FOFOA: "Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve, which requires a much higher valuation than it has right now."

Buffet: "This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further."

Hawks5999: "Can you break down the nuance between these two statements? Because they sound like they are both saying the same thing to me. Sorry for being dense if it's really obvious."

It's not really obvious, but I'll try to break it down even further for you. As JR pointed out, price and value are different things. Price is determined at the margin. Think stock to flow ratios with the ratio acting as a governor on the price in both directions.

Warren's stocks have relatively objective valuations through common metrics like earnings, operating cash flow and the sum value of their component parts. This is kind of like the NAV for GLD and PHYS. If the price falls too far below that valuation (it is undervalued), the stock to flow ratio will rise constricting the amount of flow (supply) at the margin where price is discovered. If the price is higher than the valuation (it is overvalued), the ratio will collapse flooding the market with shares.

Now compare that with gold which has no similar objective valuation. Of all the possible "unproductive assets" out there, gold has the highest stock to flow ratio because of its unique, singular properties. To think about it simply, price is determined at the margin—the flow—while value resides primarily with the stock(holders). Does this make any sense? If gold is as undervalued as I say it is, then we should expect the s/f ratio to explode, constricting the flow (supply) at the margin.

Can you see how viewing price and value from this angle puts the onus on the stock holders at least as much as on the pool of new buyers?

In light of this new perspective, we can see that price can converge with value through the actions of either the current stock holders or the pool of new buyers. And when valuation is of the relatively objective variety, as it is with OG's stocks, it is usually a combination of both.

But in the case of gold, where value is entirely subjective, this is not necessarily the case. In fact, I would even propose to you that, subjectively, those who already possess the physical gold value it higher than those who don't yet hold it. Ergo, the explosion of price to the level of value is more likely to be brought about by the existing stock holders exploding the stock to flow ratio toward infinity for a period of time than by a stampede of panicked savers driving the price higher and higher.

Cont…

2/4

ANOTHER: "People wondered how the physical gold market could be "cornered" when its currency price wasn't rising and no shortages were showing up? The CBs were becoming the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold **flowing** during a time that trading would have locked up.

(Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up [to cease flowing] as the price rises.) Westerners should not be too upset with the CBs actions, they are buying you time!"

Me: "Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve, which requires a much higher valuation than it has right now."

"Gold the wealth reserve" means A) only physical gold, and B) in its widest distribution… "which requires a much higher valuation than it has right now." "Correlation does not imply causation." Gold in its most valuable role correlates with it being in wide distribution, but it is not necessarily caused by that. Are you starting to see yet? Perhaps gold's functional change will cause its widest distribution, not the other way around.

Today's "gold" encompasses many other things. Ask any investor what percentage they have in gold and whatever they tell you will likely include mining shares, GLD, silver, maybe some platinum, and possibly not even ANY discrete, unambiguous pieces of physical gold. This is an important concept to grasp, that "gold" today is a bastardized term and the $PoG does not have anything to do with "gold the wealth reserve—which means physical gold only."

People see the "paper gold market" working today and so they think that it can work all the way up. Like we'll go from $2,000 to $3,000 to $4,000 and so on all the way up to $55K. They think that as the pool of new buyers flood into today's "gold" the shorts (or the bullion banks) will simply have to cover their exposure and bid for any physical they need until the price gets high enough for them to get it.

In many ways today's "gold" does need an expanding pool of buyers. But here's the main difference between OG's stocks and physical gold. From my 2010 backwardation post:

Dollars bidding on MSFT stock set the value of that stock. If dollars are frantically bidding on MSFT (high velocity), the stock skyrockets. If dollars stop bidding for MSFT all at once (low velocity), the price falls to zero. This is true for everything in the world **except gold**.

Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero.

And from yet another angle we can put the onus on the existing stock holders rather than a pool of new buyers.

Cont…

3/4

In the post above you just heard OG talk about three major categories of investments which are, basically, stocks, bonds and "unproductive assets". Through the singular properties of gold (durability, fungibility, divisibility, lack of industrial uses, CBs have it, etc…) along with the focal point principle, we can go along with Warren and focus on only gold as the third major "competitor".

Now in just three weeks I've written posts about both the King of Bonds and the King of Stocks dissing bonds. That should tell you something about bonds, no? So let's say it's mainly between stocks and gold at this point. As I have pointed out, stocks are for investors and gold is for savers. Savers outnumber investors by a longshot, and previously it was bonds that did it for the savers.

So now we've got all these homeless savers that will need to choose between stocks and gold (or else sit tight in bonds waiting to be sheared like either the Greek debt holders or Zimbabwe pensioners). This bunch is NEVER going to choose today's "gold" (the $PoG) en masse. They will likely end up splitting the difference and going 50/50 in stocks and bonds (or cash) while a few put 5% in GLD.

So what I don't foresee is a stampede by those homeless savers into today's "gold". There may well be another mini-stampede like we had in August, but it will display many characteristics of a bubble, including the volatility and the downside, which savers don't like. Savers aren't looking for the next XX-bagger and they don't like beta, so they are a hard sell for both OG and the $PoG. Savers simply want a nonfluctuating asset… preferably in real terms.

So Freegold, newly stabilized at a plateau stasis of ~$55K in constant dollars, will be very appealing to them. Funny to think that they'll buy gold en mass at $55K but not while it's only $1700, but hey, c'est la vie. As KindofBlue wrote: "Early adopters [of the next reference point for purchasing power] are being handsomely rewarded."

But once you realize that gold's highest value and widest distribution are correlated but not necessarily causally related in the obvious direction, the question then becomes how we get from here to there.

As I said (because ANOTHER taught me), "Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero." So you see, there doesn't need to be a stampede into today's "gold" for real, physical gold to become "priceless". ANOTHER wrote, "Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies"."

So now I'm looking only at physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold (i.e., not for paper profits). And I'm wondering when physical gold will stop moving through paper currencies, at least at parity with today's "gold", the $PoG. And I think that will probably happen when the $PoG goes too low. OBA has a neat theory about that.

Look at Buffet's piece above. He's shunning bonds but keeping his cash in bills. That's what the savers are doing while they decide where to deploy that cash. All the financial advisors across the land are advising savers to hold some cash, because they just know there will be some deals soon. And for the really big money, that means T-bills, just like the $20B Berkshire is holding. And when a trade gets that crowded it chases the yield right away, which is why the T-bills are heading to sub-zero yields.

Cont…

4/4

This is the rush out of future-dated debt into Here&Now cash (T-bills for the really big $$$). It's the bank run shoebox under-mattress effect en masse. This makes the dollar look (temporarily) strong and today's "gold" (the $PoG) look weak by comparison, gold bug protestations notwithstanding. So just imagine another quick run-up like July/Aug. to, say, $2,333 correlating with a big spike in the USDX/$IRX (price) and then a crash in the $PoG down to ~$1,000 or lower. How hated would today's "gold" be by the homeless savers then? That's some serious beta!

So that's why I said in the post, "ALL TRADERS dump ALL gold, paper, physical, whatever, in my scenario. It has nothing to do with insiders. It has to do with traders and weak hands." And at the same time… because the return is surprisingly shitty all of a sudden… "physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold" … "stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero."

This is when the stock to flow ratio explodes to infinity and physical gold goes into hiding, when the price (the $PoG aka today's "gold") gets too low to support parity between it and "gold the wealth reserve, which means physical gold only."

The current paper gold world will die (burn) as its value to users erodes, not increases!

…Again, most everyone in the Western Gold bug game is running with the ball in the wrong direction.

…So who is in danger of being hurt as this unfolds?

That's right, the Western paper gold long! I'm not talking about just the US market! This is about the entire world gold market as we know it today. The real play will be for the ones that get out in front of the move by owning physical…

It seems every Gold bug sees only half the trade and has great faith that contract law will favor a short squeeze. Yet, none of them see where it is the long that will be dumping and forcing the discount!

The point is, there is no price discovery market for "gold the wealth reserve" that could even require an expanding pool of buyers. There's only the stock to flow ratio of physical gold (gold the wealth reserve) as a tiny component part of the wide $PoG basket, today's (bastardized) "gold", a ratio which is already very high and struggling to keep from going infinite (parabolic). [Any stock with "zero" flow has an "infinite" s/f ratio because in the function r=s/f, as f approaches zero, r approaches infinity.] A rising $PoG "stretches" the existing flow making it "larger" in currency terms and keeping it from falling to zero. But what if the $PoG suddenly dips below even the cost of mining gold? What is that cost today?

Once the flow of "gold the wealth reserve" (physical gold only) is credibly reestablished at the revalued Freegold price, the savers will eat it up like hotcakes! Ergo, "its widest distribution possible."

"Correlation does not imply causation."

Hope this helps!

Sincerely,
FOFOA

Then victorthecleaner wrote:

FOFOA, fantastic! Why don't you make this an official posting?

No problem, Vic, here you go.

We also had a newcomer show up with a repost from the Gold Standard Institute website which kicked off a nice discussion about various hard money proposals and prescriptions versus emergent Freegold.

Victor starts off by asking if Rickards' proposal is even possible, and then answers his own question with this: "The answer is No. But why not? ...The answer is that the existence of the Euro prevents the United States from returning to a gold standard."

Here are a few highlights, but please go read Victor's post in its entirety:

Rickards advertises the return to the gold standard in particular with the claim that the first country that makes this step, would gain a considerable international advantage through the gain in confidence in its currency.

The problem with this statement is that the advantage of the first adopter is no longer available. The first step was made as early as 1999, and it was done by somebody else: by the Euro (€). It was accomplished in a fashion slightly more sophisticated than just a plain old-fashioned backing of the currency with gold at a fixed exchange rate: The Eurosystem of Central Banks, i.e. the European Central Bank (ECB) together with the National Central Banks of the member countries of the Euro zone, account for their gold reserve at the current market price of gold in €.

[…]

From these balance sheets, we can see that there is no advantage of early adoption that could be captured by the United States. The Euro zone has already anticipated this step, and the Euro enjoys an even more robust gold backing. In fact, all else being equal, the comparative advantage of the € over the US$ increases with an increasing price of gold.

[…]

■ In the United States, according to Rickards’ proposal, the government or the Federal Reserve guarantees that one US$ can always be redeemed for 1/7000 of an ounce of gold. The key to this guarantee is that the government pays out the gold even if there is no private participant in the market who is willing to sell her or his gold for this price. Even if the free market values gold higher than US$ 7000 per ounce at some point in the future, the United States Government is still required to redeem one US$ for 1/7000 ounces of gold (this is the point of having a gold standard after all). How clever is that?

[…]

■ Since the ECB has never claimed that the Euro were as good as gold, they need not redeem any Euros for gold. If somebody purchases gold with their Euros, these Euros continue to circulate. The Euro is explicitly advertised as a transactional currency, but not as a store of value. Gold is the store of value. This is Free Gold, the separation of the store of value from the medium of exchange, i.e. from the credit money that forms the transactional currency (also see Section 7 of The Many Values of Gold and FOFOA’s The Long Road to Freegold).

Let us finally remark that the price of US$ 7000 per ounce as proposed by Rickards merely serves as an example and that none of our arguments depends on this precise figure.

In order to illustrate this effect, let us assume that the official US gold price and the free market price in Euros diverge considerably. We estimate that the US$ and the € presently have purchasing power parity at an exchange rate of US$ 1.20 per € 1.00. As a very rough simplification, let us say that one hour of labour costs € 30.00 in the Euro zone and, at parity, it costs the same amount in the United States: US$ 36.00. Also at parity, the official US gold price of US$ 7000 per ounce corresponds to € 5833 per ounce. Let us further assume the free market price of gold in the Euro zone differs substantially: € 8750 per ounce.

Firstly, there is the obvious arbitrage: The smart money in the Euro zone can simply take € 5833, exchange them for US$ 7000 in the foreign exchange market, go straight to the Federal Reserve and redeem this sum for one ounce of gold which is immediately shipped back to Europe. There is therefore a continuous flow of gold from the United States to Europe unless the currency exchange rate adjusts to $US 0.80 per € 1.00. This is the exchange rate at which the official US price of gold of US$ 7000 per ounce agrees with the European free market price of € 8750 per ounce.

Although this adjustment of the exchange rate indeed eliminates the arbitrage opportunity, it does not stop the outflow of gold from the United States to Europe. The problem is that the currency exchange rate now deviates from the purchasing power parity of US$ 1.20 per € 1.00. At the no-gold-arbitrage exchange rate of US$ 0.80 per € 1.00, one hour of European labour can be offered in the United States for US$ 24.00 whereas American labour still costs US$ 36.00 per hour. The United States therefore run an increasing trade deficit compared with the Euro zone. Under the proposed gold standard, the Europeans who initially receive US$ for their exports, can immediately cash in and redeem their US$ for gold.

The flow of gold from the United States to Europe therefore persists regardless of the currency exchange rate. If it is not a consequence of direct price arbitrage, then it follows from an imbalance of the trade accounts. In either case, physical gold reserves are drained from the United States...

[…]

We see that the arrangement that is now proposed by Rickards, basically used to exist during the Bretton Woods period. In the late 1950s, the credit volume in US dollars was already growing so quickly that the official US gold price and the free market price of gold outside the United States started to diverge. Although the Western European allies helped to stabilize the gold standard, it inevitably failed because of the arbitrage and the trade imbalances sketched above. If a gold standard of this type is established again while a major trade block openly advertises a free market price of gold, it would probably collapse even sooner than it did in the 1960s.

In 1971, the United States chose to terminate the gold convertibility of the US dollar rather than to revalue gold in US dollars. We refer to FOFOA’s It’s the Flow, Stupid for the reasoning that lead to this decision. Finally, please see his Once Upon A Time for more details on the London Gold Pool.
_________________________________________________________
Side Note:

In fairness to Jim, Rickards/FOFOA reader Aquilus asked Jim at a book signing event about a fixed versus floating gold price. Because Aquilus knows that I, too, appreciate Jim's work, he emailed me the following report:

"The more interesting part is that I had been trying to get him to give me a straight answer on the notion (from his book) that once gold is revalued to "the right price" the Fed would then step in and defend that price (in a narrow range). He had been avoiding a straight answer for months, but I finally got one yesterday while he was signing the book - in a short one on one conversation.

When I asked him how he could seriously believe that a fixed price could be defended when dollars continue to be issued and credit created, and how that would be different from the old London Gold Pool, he smiled and said, "no, no, you see, the defended price would indeed have to change every year or else it would not work."

So, basically, he's still somewhere in the "we can semi-control" the price with this Fed-defense of an adjustable price, as far as I can tell."

UPDATE: Also see Blondie's comments right under the post. Thanks for sharing, Blondie.
_________________________________________________________

…The ECB, however, which does not guarantee a redemption of the Euro for a fixed weight of gold, can engage in various types of Gold Open Market Operations.

Firstly, in absence of a liquid market for physical gold in Euros, the ECB can act as a market maker and, say, bid for a fixed weight of gold at € 8745 per ounce and offer to sell a fixed weight at € 8755. If they bid for and offer more than 10 tonnes each at any time, they are able to make a liquid market for physical gold in Euros, a market in which other central banks can trade the quantities that typically arise in the settlement of international trade balances. As soon as it turns out that there is more weight of gold sold than it is bought (or vice versa), the ECB adjusts the bid and offer prices accordingly. This amounts to assisting the price discovery for large quantities of physical gold while the reserve of the Eurosystem remains essentially unchanged.

Let us stress that as of February 2012, there exists no liquid private market for physical gold in € in which bid and offer would be quoted for tranches of 10 tonnes or more at any time. In fact, this is apparently not even possible in the London market in which gold is traded in US$:

James G. Rickards, Currency Wars, page 26:
In ordinary gold trading, a large bloc trade of as little as ten tons would have to be arranged in utmost secrecy in order not to send the market price through the roof [...]

Secondly, the ECB can manage a dirty float of the gold price in order to smooth fluctuations in the currency exchange rates, in order to influence the domestic price level, or even in order to affect the competitiveness of goods and services from the Euro zone in the international market. If they expand the monetary base and purchase gold in the private market, they lower the exchange rate of the Euro relative to gold, creating domestic consumer price inflation and rendering exports more competitive and imports more expensive. Conversely, if they sell a part of their gold reserve and cancel the base money they receive, they raise the exchange rate of the Euro relative to gold, reducing consumer price inflation and rendering exports less competitive and imports cheaper.

In particular, if things ever turned hostile, for example because not only a book author but also some government officials started talking about ‘confiscating’ the gold owned by foreign countries, the dirty float could be used in order to terminate Rickards’ experiment with the new gold standard in the United States at any time, simply by expanding the monetary base in € and purchasing physical gold in the open market. This operation is always possible because it relies only on the ability to expand the € money supply, but does not require any existing official gold reserve. In fact, any major currency area or trade block who exports enough goods and services for which there exists a global demand, can make this move. So far, none of them has.

[…]

It should be clear from Sections 2 and 3 above that it is the high price of gold in terms of US$ or € that inspires confidence in these currencies rather than the question of whether the currency unit is redeemable for a fixed weight of gold. (There is one caveat though: as long as the US gold reserve is owned by the highly indebted government rather than by the Federal Reserve, it will never inspire the full possible confidence.)

[…]

Let us summarize what is the key point of Rickards’ proposal to return to a gold standard at a substantially higher price of gold in US dollars. It is not the idea of the gold standard that the currency unit would be backed by a fixed weight of gold. This would not be sustainable in the long run, and it would eventually fail for the same reasons for which the London Gold Pool failed. It is rather the revaluation of gold in US dollar terms that inspires confidence and that addresses many of the present issues such as recapitalizing the banking system.

509 comments:

Back in September I had an email exchange with Jim Rickards about his “peg to gold” proposition, which I reproduce here in full as it seems pertinent to the above post:

Blondie (to Jim): “I have listened with interest to your interviews on KWN, and have a query with regards to your comments from your most recent broadcast:

[KWN transcript start]

Jim Rickards: “This is what the currency wars are all about - not everybody can devalue against everybody else, you have these sequential or partial devaluations of one currency against the other, but somebody has to be the strong guy, somebody has to be the currency that’s going up so all the others can go down, and this kind of brings us back to gold, Eric, because gold is the one thing in the world that everybody can depreciate against.”

Eric King: “Then given everything you’ve said Jim, what are the implications for gold?”

Jim Rickards: ”Well the implications for gold is, gold has the unique role, because since its not a liability, (I think its the ultimate form of money because its not issued by any government) when I say that all the currencies cannot depreciate against all the other currencies, that’s true, but they can all depreciate against gold.

You know as gold is the one thing that allows every currency in the world, every paper currency, to depreciate against it, and that’s how kinda everybody wins the currency war at once, and of course the big winner is gold.

But in order to do that, you need some kind of gold standard, you need an international monetary conference, you need an agreed peg to gold, and then we can reset all the currency values against each other in ways that reflect the relative terms of trade and existing surpluses and deficits in the global trading system, and yet not have the currency wars because basically gold would have won the currency wars because it’s the one thing that everybody can depreciate against at once. It’s exactly what happened in the 1930s, it’s exactly what happened in the 1970s, and my view is it will happen again - in fact it’s in the process of happening - but nobody really wants to talk about it.”

[KWN transcript end]

You make perfect sense (I have been of the same opinion for a couple of years now too), but can you please explain the reasoning behind your statement that "...you need an agreed peg to gold..."? It seems to me that the process you are describing of essentially the need to devalue fiat and repeg gold much higher is just like the raising of the debt ceiling: kicking the can but not solving the problem.

Why the need for a peg?

Why not let the market decide the relative exchange rates of currencies and gold? Pressure is thus equalized by the system constantly, eliminating the problems which arise due to the undervaluation of gold which are culminating periodically (every 40 years) in systemic crisis?The market is the arbiter with regard to currency values, relative terms of trade and existing surpluses and deficits in the global trading system, and if gold were not intentionally undervalued this function would be performed, naturally and automatically.

You have a rare talent (and platform) for explaining the situation and your reasoning as to how it will be resolved, but on this issue of the peg to gold you supply no reasoning... are we just to accept that central planners know best?“

Jim Rickards: “It's easy to do a peg using market forces. The key is open market operations. If you (as a central bank) are a willing seller and buyer at the peg price, the market will quickly tell you if your price is too high (by selling) or too low (by buying) gold from you. You then adjust your monetary policy accordingly to equilibrate at the peg price. So, in this case, the peg is not anti-market, in fact it relies upon the market as a price signal to dictate monetary policy (versus arbitrary rule). “

Blondie: “So if, for example, the market tells you (as a central bank) that your peg is too low (by buying your gold stock), you would engage in a deflationary monetary policy to increase the value of your currency, until such time as the buying ceased?Or vice versa if your peg was too high.“

Jim Rickards: “Right. The point is, market forces are always in use to send signals about monetary policy. “

Blondie: “Could you (as a central bank) not more easily engage in open market operations in which you let the price of your gold stock float, altering your bid or offer accordingly until the equilibrium level was found? No discussing monetary policy, implementing it, waiting for the market's judgement as to whether or not you have gone far enough, too far etc.

Such a float provides an instant, dynamic establishment of the equilibrium price in accord with market forces, whereas the peg seems a slow and cumbersome method of arriving at the same destination, so slow in fact that I question what is to stop the run on underpriced gold form exhausting all stocks before appropriate monetary policy has been enacted? The market would need more than jawboning to be convinced that the Fed for example was seriously going to embark on deflationary policy to defend their peg. Deflationary monetary policy would have massive repercussions in the debt markets. The market has also seen before (twice) that the US is not above defaulting instead upon its gold obligations.

The peg does however create the impression that the CB's currency is valuing gold, whereas the float clearly demonstrates gold valuing the currency.

Is there some other unmentioned advantage to a peg as opposed to a float that I am not aware of?“

Jim Rickards: “It's difficult for companies to plan capital investment if they have no idea what the value of money will be in the future. A fixed rate helps there planning.“

I left the discussion there, as there seemed no point in continuing further. Jim clearly had no counter-argument of merit with which to defend his “peg to gold” proposition, and no intention of conceding; I can only assume he has his own reasons for promoting it, as he is clearly capable of grasping the vast superiority of Freegold to his completely unworkable peg (as demonstrated by Victor’s example above).

I did think he had shown his colors more clearly in the same interview on KWN when he stated that any monetary remedy involving gold was for him a PlanB, and that PlanA was, as far as he was concerned, the continuing reign of King Dollar.

a worthless token fiat currency is a better systemic component than a precious gold currency. Gold is too precious to capital creation and accumulation in the savings function to be squandered in the currency role. And the CBs now know this too!

F A Hayek: I do believe that if today all the legal obstacles were removed… people would from their own experience be led to rush for the only thing they know and understand, and start using gold. But this very fact would after a while make it very doubtful whether gold was for the purpose of money really a good standard. It would turn out to be a very good investment, for the reason that because of the increased demand for gold the value of gold would go up; but that very fact would make it very unsuitable as money. You do not want to incur debts in terms of a unit which constantly goes up in value as it would in this case, so people would begin to look for another kind of money: if they were free to choose the money, in terms of which they kept their books, made their calculations, incurred debts or lent money, they would prefer a standard which remains stable in purchasing power.

I have not got time here to describe in detail what I mean by being stable in purchasing power, but briefly, I mean a kind of money in terms which it is equally likely that the price of any commodity picked out at random will rise as that it will fall. Such a stable standard reduces the risk of unforeseen changes in the prices of particular commodities to a minimum, because with such a standard it is just as likely that any one commodity will rise in price or will fall in price and the mistakes which people at large will make in their anticipations of future prices will just cancel each other because there will be as many mistakes in overestimating as in underestimating.

the specific value of a currency doesn't matter in its primary role as a medium of exchange. Only stability matters.

================================

So why Jim do you want to keep the gold stable and force the value of the currency to adjust?

Jim Rickards: “It's easy to do a peg using market forces. The key is open market operations. If you (as a central bank) are a willing seller and buyer at the peg price, the market will quickly tell you if your price is too high (by selling) or too low (by buying) gold from you. You then adjust your monetary policy accordingly to equilibrate at the peg price. So, in this case, the peg is not anti-market, in fact it relies upon the market as a price signal to dictate monetary policy (versus arbitrary rule).

Blondie: “So if, for example, the market tells you (as a central bank) that your peg is too low (by buying your gold stock), you would engage in a deflationary monetary policy to increase the value of your currency, until such time as the buying ceased? Or vice versa if your peg was too high.“

As I explained in Big Gap in Understanding Weakens Deflationist Argument, the value of any currency is determined by a kind of tug-of-war between supply and demand. The demand side is the marketplace and the supply side is the printer. This was true even when gold was the currency. If the market demand for gold was rising faster than it could be pulled out of the ground, the value would rise and the circulation velocity would slow, often causing a slow-down in the economy sometimes resulting in recession or even depression. This tends to lead to monetary revolt and the re-emergence of easy money.

The point is, all the market wants is a stable currency, not too hot, not too cold. It is like a sleeping giant. Give it a stable currency and it will keep sleeping. Wake it and you (the printer) will lose control of the value of your currency and everything else you try to control. The market is the demand side of the equation. And the market is by far the more powerful of the two sides in this tug-of-war. If this isn't making sense, please read my post linked in the paragraph above because I'm not going to explain it all here.

To summarize, there is a whole menu of options for the aspiring money printer to choose from when stepping into the supply side shoes of the monetary game. And as a supply sider, his job is providing a service to the demand side, the market, which wants one thing and one thing only, a stable currency. And if he wants to keep his job, he'd better give his clients what they want, because if they wake up to an unstable currency, they can easily take the reins of control away from him. So if his mandate is—or evolves into—anything other than a stable currency, he will not be long for this monetary world. And one last thing; instability means quick changes both up and down. The client doesn't want drastic inflation or deflation.

Remember the analogy of the tale of Ben and Chen from Focal Point Gold. The one Aristotle wrote a great comment about here.

A point of this tale, as illustrated by FOFOA and Aristotle, is that a floating/increasing valuation of gold helps ensure that the system is sustainable, as contrasted to the unsustainablity of a fixed price of gold. As FOFOA wrote:

I hope that this little analogy helps you visualize the separation of monetary roles, because those talking about a new gold standard are not talking about this. I understand that sometimes you have to speak in terms familiar to your audience in order to not be tuned out, but I also hope that my readers come to understand how and why a new gold standard with a fixed price of gold, no matter how high, will simply not work anymore.

The full explanation of why it will not work is quite involved, and I'm not going to do it here. But the short answer is that the very act of defending a fixed price of gold in your currency ensures the failure of your currency. And it won't take 30 or 40 years this time. It'll happen fast. It wouldn't matter if Ben decided to defend a price of $5,000 per ounce, $50,000 per ounce or $5 million per ounce. It is the act of defending your currency against gold that kills your currency.

You can defend your currency against other currencies… using gold! Yes! This is the very essence of Freegold. But you cannot defend it against gold. You will fail. Your currency will fail. Slowly in the past, quickly today. If you set the price too high you will first hyperinflate your currency buying gold, but you won't get much real gold in exchange for collapsing the global confidence in your currency, and then you will have to empty your gold vaults selling gold (to defend your price) as your currency heads to zero. And do you think the world trusts the US to ever empty its vaults? Nope. Fool me once…

If you set the price too low, like, say, $5,000/ounce, you will first expose your own currency folly with such an act and have little opportunity to buy any of the real stuff as the world quickly understands what has gone wrong and empties your gold vaults with all those easy dollars floating around. You will sell, sell, sell trying to defend your price, but in the end, the price will be higher and you'll be out of gold. Either that, or you'll close the gold window (once again), sigh, and finally admit that Freegold it is.

Interesting exchange with Jim R. What I got from it is that Mr. Rickards does not want to see Triffens Dilemma resolved. He wants the dollar to continue in the role of world reserve currency. I wonder why.

"Gold the wealth reserve" means A) only physical gold, and B) in its widest distribution… "which requires a much higher valuation than it has right now." "Correlation does not imply causation." Gold in its most valuable role correlates with it being in wide distribution, but it is not necessarily caused by that. Are you starting to see yet? Perhaps gold's functional change will cause its widest distribution, not the other way around.

Gold's functional change/revaluation will cause lotsa people to realize its wealth reserve role and lead to a wider distribution of gold.

First, let me ask you a question. Which of these two scenarios should be more instrumental in the transition to Freegold?

1.) A bottom-up shift in value perception as millions and even billions of small savers use their meager dollars all at once to bid up the price of gold.

2.) A top-down shift in risk perception as the very few physical gold holders of size in the world all at once withdraw their physical from the marketplace.

Just think about this question. That is its only purpose. And one more; Would either of these events be exclusive of the other?

Above FOFOA made clear:

Ergo, the explosion of price to the level of value is more likely to be brought about by the existing stock holders exploding the stock to flow ratio toward infinity for a period of time than by a stampede of panicked savers driving the price higher and higher.

Its about the big holder's withdraw of stock from the flow, when "physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold" … "stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero."

This is when the stock to flow ratio explodes to infinity and physical gold goes into hiding, when the price (the $PoG aka today's "gold") gets too low to support parity between it and "gold the wealth reserve, which means physical gold only."

===================================

Freegold transition does not require small sizes. They will likely be an after effect. The vast majority of currency is traded for life's necessities and debt service rather than the timeless wealth asset of Kings. Following in the footsteps of giants requires more than pocket change.

Excellent explanation in your reply to Hawks5999. I compare your explanation to something like unscrambling this random jumble of splotches. Once the brain sees what's in the scrambled image, it is impossible to go back to a state where one was thinking it was scrambled.

So with what you are saying, the $PoG falling is actually an indicator that physical gold is getting more and more reluctant to bid for dollars and $PoG=0 means that there is no bid from gold to dollar.

The future price of gold falling and falling, is misleading in many ways because it gives the illusion that the dollar is getting stronger and stronger, whereas in reality it is getting weaker because the bid from gold to dollar is reducing continuously. Wow!

So the CBs should actually be worried if gold price is falling and they'd want the $PoG to keep rising, albeit in a controlled fashion. I guess negative real interest rates and their anti-correlation to $PoG explains this concept.

Even if $PoG falls, it's not that the gold bubble is deflating, it's that the dollar credibility is deflating because the bid from gold on dollar is falling.

"Virtual reserve currency" means something—like the SDR—that's primarily a unit of account for the purpose of providing monetary stability. But with the primary and secondary media of exchange becoming separate but symbiotic counterparts, stability will be automatically achieved, and a "commodity-based" super-sovereign unit of account comparing fiat M3 with a centrally managed gold price will be completely superfluous and unnecessary (i.e., as unused as the SDR).

[...]

this very scenario—$IMFS collapse—was faced 32 years ago and a solution was crafted at the highest levels. That solution took 20 years to launch (at great cost, mind you) and today it stands at the ready. If you read too much ZH and thereby think the European debt crisis changes things in some way, guess again. The European debt crisis is a symptom of the dying $IMFS, not the Eurosystem. In every way this is true.

Jim talks about the sociopathic bond vigilantes (a relic of the $IMFS) who can take entire countries down through the debt markets. He talks about them waging WWIII in the bond markets every day. If you want stability, insulated from these sociopathic traders, you don't want some slipshod unit of account basket solution patched together by the IMF at the 11th hour. You're more likely to fall back on the long-line plan that took two decades to implement and another decade to season.

The Achilles' heel of the $IMFS is that debt is the system's official store of value and foreign exchange reserve. And bearing this flaw, savers, currencies, banks, governments and even entire countries are all vulnerable to the inevitable failure of the debt.

The problem with debt performing these functions is that debt is a derivative of the currency itself. Currency moves opposite the flow of real goods and services. And with a derivative of the currency acting as the only counterbalance to uneven trade, there emerges the exact opposite of a natural adjustment mechanism for correcting trade imbalances.

With debt as the store of value and official reserve asset, the party producing more real goods has no way to record his net production (savings) other than lending that excess currency back to the consuming party, encouraging him to consume more, and recording the new debt. A true adjustment mechanism makes the balance swing back and forth. But the debt system requires an infinite debtor. So the system is designed to fail. The debt backing the system is designed to fail. And as the official store of value and reserve asset, the savers, currencies, banks, governments and even entire countries are destined to fail in the end… under the $IMFS.

Enter the euro. According to the ECB website, the road to the euro began in 1962, shortly after the launch of the London Gold Pool which aimed to keep gold cheap in support of the $IMFS. The French were the first to pull out of the Gold Pool and also the first to mark their gold reserves to market in 1975. By 1997 even the Germans were marking their gold reserves to market in anticipation of the euro launch date.

[...]

The point is, there's a turn-key problem-solving system waiting in the wings. So whenever you hear anyone in the hard money camp or the Anglo-American press talking about something that sounds like the SDR with "gold backing" (watch out for that word "backing") don't buy it for a second. They simply don't have the full picture and, therefore, don't know what they're talking about when it comes to macro solutions. But even so, they're still right when they recommend that you get your butt out of that reclining black office chair and take personal responsibility for your wealth.

Here is Randy Strauss on the strange obsession with the notion of replacing the dollar (as a reserve currency unit) with simply another institutional emission of similar ilk (such as currencies of other nations, SDRs, bancors and whatnot).

Randy also insightfully notes, similar to FOFOA above, that what IS desperately needed is not another "institutional emission of similar ilk" but a universally respected reserve asset capable of filling our current void with a reliable presence that serves as a store of value. The SDR is a unit of account, not a reliable store of value. The lack of unit of account is not the problem - we already have many institutional emissions of similar ilk. The problem is the lack of a sustainable, stable store of wealth - "The debt backing the system is designed to fail."

The news said "...This has led to a rising call for the creation of an alternative to the dollar in the form of a new world currency. It would be an enormous mistake to discount these calls as a sideshow. The odds of a world currency emerging have never been higher.

The calls are coming from many corners. Nobel Prize-winning economist Joseph Stiglitz chaired a United Nations panel that recommended the creation of a global reserve currency. Zhou Xiaochuan, governor of the People’s Bank of China, proposed that the International Monetary Fund take over the global leadership role traditionally ceded to the U.S. And Russian President Dmitry Medvedev handed out minted coin samples of a new world currency at the recent Group of Eight meeting in Italy.

These calls are worth paying attention to for a number of reasons. The arguments for a world currency are much better than you might think. An alternative to the dollar clearly has a promising market that can develop even if it is opposed by the U.S..."

RS Comment: So often in commentaries of this sort that propose a “solution”, the author is strangely obsessed with the notion of replacing the dollar (as a reserve currency unit) with simply another institutional emission of similar ilk (such as currencies of other nations, SDRs, bancors and whatnot). Their avoidance of any meaningful discussion of the most obvious remedy is almost pathological in the extreme. To be sure, we don’t need to invent any manner of universal reserve currency to fill the role of a unit of account because that role is already served in a fully functional capacity for any given country by its own monetary unit.

What IS desperately needed, however, is a universally respected reserve asset capable of filling our current void with a reliable presence that serves as a store of value. And far from needing to be conjured or created by complex international committees, that asset is already in existence and held in goodly store by central bankers and prudent individuals around the world — it’s known as gold. From amid the ruins of a chaotic financial crisis that was brought about by its own complexity, a degree of sanity will prevail, and gold as a freely floating asset will arise in stature as THE important element of global monetary reserves. The floating aspect is the vital evolutionary improvement over all previous structural monetary failures which tried to use a gold standard at a fixed price (i.e., unit of account) perversely joined to the very elastic money supply of any given country’s banking system.

So do we see that Jim Rickard's comment that "#SDR solves #TriffinsDilemma because #IMF not a country, has no trade deficit" is not right?

Its all about the store of wealth role. Triffin's dilemma highlights **two dollar flaws,** and solving flaw #1 by severing the link to the nation state doesn't alone resolve the dilemma. The key is solving flaw # 2 - trying to be as good as gold. From The Return to Honest Money

For any real economists out there, here's how Freegold resolves Triffin's dilemma.

Triffin's dilemma highlights two flaws in the dollar and its use as the global reserve currency. Flaw #1 is the dollar being a national currency and also a supra-national global reserve currency. Flaw #2 is the dollar trying to be as good as gold in the store of value role via US Treasuries. What I mean in flaw #2 is that the dollar's credibility is hurt by a rising price of gold and, therefore, it must systemically manage that threat by backing the fractionally reserved bullion banking system which eases the natural supply constraint of gold.

The euro has eliminated both of these flaws in its fundamental architecture. It is not a national currency and it does not oppose a rising (in the present case) or a free floating (in the future case) price for non-fractional physical gold reserves. I have written extensively on this topic, and the bottom line is that gold is not yet free floating, even today, because its market is encumbered by many forms of gold IOUs that trade at par with the physical stuff through the support of the dollar system.

You can obviously resolve Triffin's dilemma by removing both flaws. But removing #1 alone is not enough, while #2 alone is enough.

Triffin's dilemma observes that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between short-term domestic and long-term international economic objectives. But this is only the case if that currency does not embrace a "secondary media of exchange" that is allowed to float in value in a quantity not managed by the currency manager (i.e. physical only), and can be purchased and stored in lieu of retaining debt denominated in the primary medium.

Imagine, if you will, the euro supplanting the dollar's role as the globe's super-sovereign currency unit. This is (at this point) merely a conceptual exercise for all you anti-conceptual mentalities. Let's compare the two with regard to Triffin's dilemma.

How often do we hear euro critics repeat that the euro, a currency without a country, has no political union to back it and is therefore worthless? The US dollar has a country, but in its role as the world's currency it also functions just like the euro, without a global political union.

The fundamental difference between these two units of account (the dollar and the euro) is their relationship with gold.

If you have followed my blog at all, you know that the euro has Freegold, the wealth consolidator and "real money" with no country, no links and no political union to back it. So which unit of account (€ or $) is closest to gold? Which currency, of these two, is most likely to be preferred as the global reserve currency next to Freegold in the wealth reserve role?

The point is, once "Freegold" (nature's wrath) inflicts itself upon us all, it won't really matter what is chosen/used as the super-sovereign or supra-national currency to lubricate international trade. It could be the euro, the yuan, the SDR, Facebook Credits or even the dollar! Triffin's dilemma will be gone. And you shouldn't worry so much over the transactional currency question, because that will be chosen through the market forces of regression, the network effect and game theory's focal point discovery at the international level.

The Fed is saying "Yeah we've got the entire safe asset (as perceived by the public) spectrum covered, move on to risky assets" and it is really not happening. To me, it looks like they can do all they can but they *cannot* fundamentally change the subjective nature of risk-aversion for savers.

My question is: can the fiscal policy of the United States have a positive impact and avert a hyper-DEFLATION in the dollar? (a hyper-DEFLATION in the dollar eventually leading to a run on the currency itself due to complete loss of trust).

The author writes: The process that has now started is for that giant pool of money, owned by the investor class, to combined with the giant pool of debt owned by the borrower class until it all cancels out. There are many ways to effect this wealth transfer – none of them popular with the plutocracy.

The least painful solution is general inflation. True inflation, with wage as well as price increases, helps borrowers pay back loans with less valuable money while investors lose money in constant dollars on their loans. Restoring New Deal reforms that were enacted after the last Great Depression and have been eroded ever since, would improve the situation. Progressive tax rates like those from the Eisenhower era would help as well. But we will hear none of this from our politicians until civil unrest spreads far and wide. We are living in a precarious time.

Again, I want you to think about that last line or two, "As a result, the larger supply of money actually has a smaller total purchasing power than the previous lower supply of money. There are, therefore, paradoxically, complaints of a "shortage of money."

So what does the supply of money have to do with the catastrophic loss of confidence that is hyperinflation? Yes, the catastrophic loss of confidence drives prices higher. This makes the present supply of money insufficient to purchase a steady amount of goods (USG junkie fix). True balls-to-the-wall hyperinflation requires a feedback loop of both value and volume. Value drops, so volume expands, so value drops more…. Without the feedback loop, you simply get the Icelandic Krona or the Thai Baht. With the USG in the loop, you get Weimar!

Think about a debtor who owes a hard debt to a loan shark versus a junkie who owes a regular, ongoing, hard fix to himself. Which one is worse off? Which more desperate? As I wrote above, this intractable problem cannot be solved in the monetary plane, except through dollar hyperinflation!

Big Danger in "A Little Inflation"

I just received an advance copy of Jim Rickards' new book, Currency Wars (thank you Steve and Jim). And while I haven't had a chance to read it yet (because I've been working on this post), I have it on good authority that Jim thinks the Fed is actually targeting 5% annual inflation right now while saying 2% or a little more. This sounds credible to me.

So what's the danger in a little inflation?

If the dollar sinks, like they (the USG/Fed) want, sure, our exportable goods will become relatively cheaper abroad (even though their price here won't drop) and their (our trading partners’) exportable goods will become more expensive here. This will appear as good old-fashioned price inflation, since we’ll now have to outbid our own trading partners just to keep our own production, and pay more for theirs. And while the domestic private sector has already crashed its lifestyle somewhat, the currency issuer has increased its "lifestyle" to compensate.

The bottom line is that the USG cannot crash its own lifestyle. And when the dollar starts to "sink", that pile of pennies in the video above will be insufficient (not enough money). Luckily, that pile of pennies represents the budget of the currency issuer himself. So he’ll just increase it, to defend his lifestyle, while scratching his head at why the trade deficit has nominally widened rather than narrowing as he thought it would when he trashed the dollar.

One of the strongest arguments that the USD will not hyperinflate like Weimar or Zimbabwe is that the USG's debt is not denominated in a foreign currency. If it were, this would be a different kind of hyperinflationary feedback loop we were facing. If all the USG debt was in a foreign currency and the dollar started falling on the foreign exchange market, that debt service would lead to hyperinflation. But that is not the case. So it’s not the FX market (monetary plane) that is the big danger to the dollar.

The dollar is the global reserve currency, so it is the physical plane that is the biggest threat to the dollar in the same way the FX market was a threat to the Weimar Mark. And it is not the nominal debt service that is the threat like it was in the Weimar Republic, but it is the structural (physical plane) trade deficit. To the USG, that is the same threat as nominal debt service denominated in a foreign (hard) currency was to Weimar Germany.

As the German Mark fell, there was "not enough money" to pay the debt. And with a little inflation, there is "not enough money" to buy our necessities from abroad.

Thanks for the post, great insight and discussion. I am still somewhat new to the freegold concept so I am still learning a lot.

My question is how would the mechanics play out. If the bullion banks don't offer pricing and there is no 'official' pricing mechanism where would one be getting the knowledge of price, how would you know what is fair at that time?

Also it strikes me that much of this relies on clear thinking intelligent people making decisions. Most politicians dont inspire much confidence in that regard. The only guy that seems to have a clue is Paul and from what I have read it seems like most freegold people think even he does not have it all right. So how would this happen if all the people in power are so far removed from a rationale outcome?

Hi Everybody. Does not the fact that Greece has to put its Gold up as collateral for the bailout kind of render Freegold obsolete? If the big banks can work this fraud all the way through the euro, then at the end Europe will not have any Gold left, the banks will own it all.

The mechanics of freegold are very different from the old gold standard.

Whereas we were conditioned to think that the official state gold hoard must somehow be involved (as it was in redeeming your dollars for gold at the Treasury or an official institution), the idea in freegold is that we mobilize the PRIVATE gold first.

How do you do that? In order to get the massive private stock to flow, you need to keep upping the bid until the big individual owners consider it worth bidding for currency with their gold.

Once you are at that plateau, there will be ups and downs based on currency management, but it will stay largely stable, and there's no need to exchange your dollars for Treasury's gold.

@All - I have just skimmed the article and some of the comments. Now that FOFOA "outed" me ;-) , I will have some more Rickards comments from my 2 author meetings I attended, and Twitter conversations when I get a chance later in the weekend.

you wondered " If the bullion banks don't offer pricing and there is no 'official' pricing mechanism where would one be getting the knowledge of price, how would you know what is fair at that time?"

Assuming the paper markets collapse, how does gold get priced? As Aquilus wrote, "In order to get the massive private stock to flow, you need to keep upping the bid until the big individual owners consider it worth bidding for currency with their gold. " Who bids? Maybe these peoples:

"Where do you find the price of gold today? Kitco.com? CNBC? Goldprice.org? In all those places the price of gold will eventually fall. To what? I don't know. Maybe $500. Maybe $200. There are reasons why I think trading may be halted at around $500, simply to make sure that certain contractual gold deliveries are completed to certain privileged parties in the near future. But those will have nothing to do with you. For you, the price of gold that you find everywhere will be $500, but you won't be able to take delivery of any physical. Kitco will probably still sell you $500 shares of its pooled account. But they won't let you take possession. You'll still be able to buy and sell GLD for $50, but no physical. This is why I tell people to only buy physical gold and take possession of it! Today! Don't wait for the price to fall!

This is what will happen to the paper gold market (the only gold price discovery market there is today) when its futures all go into permanent backwardation at the same time. When infinite demand meets zero physical supply. When all COMEX registered physical is withdrawn from delivery. When all the holders of physical gold -->IN SIZE<-- stop bidding for dollars with their physical gold. This will be concurrent with the loss of confidence in the dollar, because it's gold bidding for dollars that matters, not dollars bidding for gold, although causation between the concurrent collapses may be unclear at the time.

Another and FOA wrote about this. They called it "physical gold going into hiding for a while." They also said that the BIS would soon after fill the "gold price discovery void" with a new physical-only gold market for the Giants, because the euro needs an accurate gold price each quarter to mark its reserves by. And they will not use that $500 price if no physical can be had at that price. "

ANOTHER: The BIS is the gold broker for all interbank sales / purchases. Bullion Banks are for sales to other entities.

[...]

[FOFOA]Physical gold is different than modern currency. At the CB level, it rarely gets moved. This was a big reason for the creation of the BIS in the first place. If you think about the purpose of the BIS as a clearing system or gold broker for interbank sales, it makes perfect sense that most of the gold deposited with the BIS would be sight or unallocated.

The purpose is so that CBs can transfer gold around the world without having to physically ship it. Avoiding the cost and risk of physically shipping a heavy metal is an important service provided by the BIS. And it does this mostly in unallocated form. When the BIS physically moves gold, the risk is shared, i.e. the risk is on the BIS.

The BIS is owned by its customers, the CBs. They set it up and subscribed to it (bought in) so it could provide services like this. The BIS's own gold is still owned by the CBs because they own a proportional share of the BIS.

Say you want to give me a hundred dollars. You go into your bank and deposit a hundred dollar bill. Then you fund your Paypal account and send me $100. Then I send that $100 from my Paypal to my bank and I can walk in and take out that $100 bill. You’ve just sent me a $100 bill but no one actually physically shipped it across the ocean. It was an unallocated deposit in one location and an unallocated withdrawal in another. This is what the BIS does with gold.

so who bids? The BIS. Or maybe the ECB itself. As stated in the above excerpt of Victor,

in absence of a liquid market for physical gold in Euros, the ECB can act as a market maker and, say, bid for a fixed weight of gold at € 8745 per ounce and offer to sell a fixed weight at € 8755. If they bid for and offer more than 10 tonnes each at any time, they are able to make a liquid market for physical gold in Euros, a market in which other central banks can trade the quantities that typically arise in the settlement of international trade balances. As soon as it turns out that there is more weight of gold sold than it is bought (or vice versa), the ECB adjusts the bid and offer prices accordingly. This amounts to assisting the price discovery for large quantities of physical gold while the reserve of the Eurosystem remains essentially unchanged.

Does not the fact that Greece has to put its Gold up as collateral for the bailout kind of render Freegold obsolete?

Who knows if the ECB has arranged for Greece's gold to be up as collateral, but if it has, yeah, a GELOC is a huge step on the road to super high priced gold!!

Here's a hint: see Dr. Evil!! He says says one million dollars in gold. Not one ton of gold.

hint #2: "Aramco owed the Saudis $3 million a year, but it had to be paid in gold. They didn't owe 2.67 tonnes of gold per year, but that's what they had to pay because the US fixed the price of gold at $35 per ounce. The US could have raised the price of gold to $100/ounce and then it would have only had to ship .93 tonnes of gold to the Saudis! "It's the Flow, Stupid

When it comes to detailing the history of global currency wars and predicting the short term moves of central banks, there is no one better than Jim Rickards. He's proven that many times. These contributions alone make his thoughts worthy of following.

But when it comes to solutions to the imbalances of the global monetary system, one should proceed with extreme caution when listening to what Mr Rickards has to say.

He obviously has an agenda. As Blondie alluded to earlier, his affinity for "King Dollar" is an impediment that keeps him from telling the truth.

It's quite obvious he's read and understands the thoughts of A/FOA/FOFOA. We've all heard him say many things that he otherwise would not know if he didn't have the same understanding we have. He knows what is right, yet much of what comes out of his mouth is wrong......And he says the bond vigilantes are sociopaths?!!

I suppose rubbing elbows with all that Pentagon brass has caused him to come down with an unusual case of Stockholm Syndrome, but I doubt it. I'm of the belief that he is some sort of hyper-nationalist who believes that "American Exceptionalism" gives the US the right to foist her will upon the rest of the world.

Not only is this apparent in his desire for the US to return to a fixed gold standard, but also in the agitprop he's recently been spewing concerning the inevitable US war with Iran.

When confronted about this, his default excuse is "I'm not giving recommendations. Just analysis." This is his M.O. now as well as when he was suggesting that the US would confiscate foreign gold held at the NY Fed. I call BS on this. Either he's COINTELPRO being used to infiltrate the goldbug community and steer them in a certain direction or he's giving recommendations to the USG on how to maintain the USD as the world reserve currency.

Either way, he can't be trusted.

For those who don't know, I'm a barber by trade. In my profession, we're taught early on to never trust a man with a comb-over because he has something to hide. Well, Mr Rickards has a comb-over AND a mullet: Double Whammy Red Alert!!!

So, you tell me: Am I wrong? Is Mr Rickards just confused, or is he something else?

I found Rickards book very informative. And I don't discount the gold confiscation opinion.

That being said, he is very proud man who is enjoying the success of his book and all that comes with that. And despite his purposeful ignorance of this blog and the topic of freegold, I am quite certain that Mr. Rickards is a very strong handed holder of a substantial amount of physical.

FOFOA: "[...] both the King of Bonds and the King of Stocks dissing bonds. That should tell you something about bonds, no?"

Well, yes. I'd say they want to buy some :) So it's probably gonna be a good investment.

But back to freegold. While reading this post one thing hit me. The paper gold will burn. When this happens, what price will be used for eurozone MTM party? There's no free market physical price to quote now, will there be one when paper burns?

The paper gold will burn. When this happens, what price will be used for eurozone MTM party?

I bet if you look through the preceding ten comments, you will find multiple comments that address your question. Look for this:

Another and FOA wrote about this. They called it "physical gold going into hiding for a while." They also said that the BIS would soon after fill the "gold price discovery void" with a new physical-only gold market for the Giants, because the euro needs an accurate gold price each quarter to mark its reserves by."

Now, the BIS could provide gold market to the giants. I assume that right now, the giants engage in gold trading outside the view of the public. None of us has any idea how much a giant pays for gold when he buys in bulk. But under Freegold, this market for giants would have to be completely transparent, yes?

But there also needs to be a market for us shrimps, yes? And the ECB and national CBs can be market makers for us, yes? Would they offer their gold for sale to the shrimps? Or would they rather just act as a kick-starter for the real physical free market? Does any of this even matter?

I guess if ECB/CBs act, the commercial banks would quickly jump on the bandwagon and provide a network of outlets for shrimps to buy/sell. That would probably make for a thriving market rather quickly, me thinks.

Hmm, now that I wrote that, there's a trend here in my country for banks to offer gold sales. There are 3 that I know of currently. I think 2 of them started doing that just last year, so it's a new development. But it's expected by many that more will follow, and that they will eventually push most gold dealers out of the market. Could be, the market for gold here is rather shallow and gold consumption is abysmal when compared to Germany or Switzerland.

Can anyone here write how this looks in western europe? Can you just walk into a bank and buy/sell a krugerrand?

And sorry for a little chaotic comment, I probably need some time to put the pieces together.

It's not so obvious to me how the structural trade deficit (in the physical plane) of the USG would be widening further and further to the point of no return.

Is this because of the expansion of USG debt to compensate for the private sector debt? If USG debt continues to expand, to maintain the "lifestyle", then I don't understand how that directly leads to:

" while scratching his head at why the trade deficit has nominally widened rather than narrowing as he thought it would when he trashed the dollar. "

Sorry for being slow, but what's the connection between that clip and Rickard's attention seeking character. I will say it reminded me of my college band days when I flirted briefly with naming the band, "Oh yeah, baby."

I have a really hard time choosing a favorite Sabbath tune, I like them all. The first four albums are equally awesome, IMHO. Their whole story starting with Tony losing part of his fingers on his fret hand, then having to change his tuning and playing style, which led to their "sound". Geezer being a guitar player and basically playing the bass like a second guitar. It all culminated in a sound that morphed into what we now know as Heavy Metal.

More neat trivia, for fun - The first known use of distortion was accidental. Dropped, damaged amps had to be used as they didn't have a choice. Some of the early Bluesmen dug the sound and it evolved from there. Thank baby Jezus for damaged amps:)

@tripper:Can anyone here write how this looks in western europe? Can you just walk into a bank and buy/sell a krugerrand?

Well in Scandinavia (Sweden, Norway, Denmark) if you walk into a bank and try to buy physical gold they would laugh at you. Maybe even suggest going and seeing a psychiatrist.

Here is couple of facts:- The biggest retail seller of physical investment gold in northern Europe has sold 49 Kg of gold in Denmark last year (2011). Denmark is a country of 5 million people (and one of the richest parts of EU) so that’s 0,0098 gram per person (or 1/100 of a gram per citizen).- In Sweden “Store of value” par excellence is a house or condo. Everyone “owns” a house or apartment even though it takes, on average, 120 years to pay it off. - In Norway there is VAT (25 %) on gold bars (no VAT on numismatic coins though). In 2004 Norway’s CB sold all of its gold (33,5 tons). The reason was gold yielded nothing and comprised only 1% of Norway’s sovereign oil wealth fund (worth about $600 billion today). The sovereign oil wealth fund is invested in 60% stocks, 35% bonds and 5% fancy real estate downtown London and Paris.

Bear in mind that there have not been any real war in Scandinavia for over 200 years. So the confidence in authorities and paper currencies is enormous. If you save\invest in something then it is stocks, bonds and of course real estate.

Physical gold then? You can’t eat physical gold (useless) and it is in a bubble. :-)

In this Keiser Report, the guest is talking about p2p monetary functions.

It starts at the relevant point: He mentions a currency, credit, and then store of value function of these p2p techs. Saying people might start experimenting with different kinds of peer based financial functions, including store of value.

http://youtu.be/ClNCOSS4nGs?t=16m46s

He thinks it could ultimately lead to central bank obselesence.

If you listen to his reasoning, he cites freedom of the market to do as it will, which is antithetical to central banking. Free competition, game theory, invisible hand of natural economic function. New paradigms of intellectual property.

But, he underestimates the physical world of gold, or at least his thoughts on savings and gold go unstated.

You are correct. I should have added the words 'mainstream' or 'on television' somewhere in that paragraph. Of all the usual suspects in the CNBC/Bloomberg lineup, Rickards has the most accurate prognostications and seems to speak our "language" more than anyone else. That's why it pisses me off so much that he USES the Thoughts of A/FOA/FOFOA to further his nationalist agenda by leading people astray. I view it as a form of blasphemy.

Tripper,

I've suspected for some time that post-RPG, (after some confidence is restored) if banks want to remain relevant, they'll start offering insured, allocated gold accounts for their customers. I expect these accounts will replace the function of the CD and savings account for most people. I also expect that you'll be able to buy physical gold through your local bank. It wouldn't be much of a bank if it didn't deal in the focal point of wealth reserves, would it?

Sleeping V & Nickelsaver,

Since we're on the subject of favorite Sabbath songs, I figure I'd add my two cents/atoms:

For me, there are two Sabbaths. One is Ozzy's and one is Ronnie's. I'm sure there's been plenty of debate on which is best, but I don't rationalize it that way. They sound like two different bands to me, so in my mind, I treat them as different.

Dante_Eu: Well, Tavex (who I assume are the biggest seller) may have sold only 49 kg in Denmark in 2011, but they did sell 604 kg in Sweden and 564 kg in Finland. (I have no idea why the Danes are so different from their neighbours in this regard.) In Sweden, sales at Tavex averaged 430 kg per year in 2008-2010, so it's up by 40 percent in 2011. And note that that's measured in weight. With the rise in the gold price, sales in SEK are up considerably more.

I don't have any current data, but in 2009, Tavex seemed to have about a third of the Swedish investment gold market. If that's still the case, then gold sales in Sweden were somewhere north of 1.5 tonnes in 2011. Not too shabby, given the long history of gold uninterest in this neck of the woods.

Long time lurker, first time poster. Have been meaning to start adding to the discussion for some time.

Should begin by thanking FOFOA et al for an incredible range of insight. The clarity and tenor here is unparalleled.

Finally logged in to respond to Dante_EU.

Expat, currently in Sweden. Live with Swedish partner. Don't know so much first hand about Norway, Denmark.

Riksbank here has about 0.5 Toz/person.. middle of the road etc, but not like Norway that have cast their lot in with energy. From the same single store, Sweden purchased 600 Kg in 2011(9M pop = 0.075 g/person) .. equivalent to India purchasing 70 tons from their largest store. Way behind the per cap share of mine production anyway, but the largest holders likely don't shop there. My theory is that most Swedes see their single largest store of value as Swedish society, full stop. This is both a massive strength and a massive blind spot.

Sweden runs a trade surplus/ very little national debt; bank foreign investment and mortgages are the achilles heel here (as in the early 90s). The countryfolk here are indeed a bit real estate crazy (with ridiculous leverage e.g. 70% of the mortgage goes at national prime rate and isn't amortized.). Denmark is worse. However, debt laws are draconian in Sweden (no real equivalent to bankruptcy) and because so many are involved with real estate, I am convinced they will print again as national policy to keep nominal prices and the banking sector stable. As with the rest of the EU, gold is VAT free. Widely available in physical (but not in banks). Spreads are roughly 3%.

My observation is that although most are deeply in the RE as a road to wealth mindset, it is also more necessary to buy here because of a paucity of rental options.

Despite this, many Swedes at least understand gold. When we started to have extra to save, my partner was skeptical about investment options (we are both savers). I suggested gold and her response was 'Yes, of course gold for the long term, but we shouldn't invest in anything financial'. Many anecdotes from other contacts as well. Gold is firmly esconced as a credible option when they stop to think. And at least one Swede certainly gets it after showing our household balance sheet month after month for years ;) Other Swedes are rapidly cluing in as the current gov't weakens the social bargain.

I also can add a insight from some other friends. One (French) inherited a good chunk of cash a few years ago and asked for some investment advice. I said 'put it half in gold, half in cash. If the EU prints, the gold will more than insure the cash. If not, the cash will buy you more than you thought'. He said 'I don't like thinking like that'.. wanted stocks. Another (British, old wealth) had it all in sovereigns. A couple data points anyway.

Anyway, sorry for the long post.

PS. favourite sabbath is NIB. Used to play it with a band back in high school.

Another point is that depending on the EUR/SEK pair, it is often cheaper to buy gold from a German source, so take national figures with a grain of salt. True for online shopping, and especially true if you find yourself in Germany for the day and accidentally take out too many Euros.

My first guess for the Danish divergence is again the cost of entry of real estate (and taxes). Check out Danish household debt. If you want to be part of that lifestyle the mass mindset is to either save for real estate, never mind that saving in gold is far better over the time it takes, or to buy before you can afford it.

The **nominal** structural trade deficit is widening because the USG's response to a "little inflation," which makes the imports more expensive and US's goods cheapers for others, is to print more so they can keep importing the same amount. The USG is a consumption machine, consumption is its fix - its gotta consume. With a little inflation, "we’ll now have to outbid our own trading partners just to keep our own production, and pay more for theirs." Its that "outbidding" that sets it off.

If the dollar sinks, like they (the USG/Fed) want, sure, our exportable goods will become relatively cheaper abroad (even though their price here won't drop) and their (our trading partners’) exportable goods will become more expensive here. This will appear as good old-fashioned price inflation, since we’ll now have to outbid our own trading partners just to keep our own production, and pay more for theirs. And while the domestic private sector has already crashed its lifestyle somewhat, the currency issuer has increased its "lifestyle" to compensate.

The bottom line is that the USG cannot crash its own lifestyle. And when the dollar starts to "sink", that pile of pennies in the video above will be insufficient (not enough money). Luckily, that pile of pennies represents the budget of the currency issuer himself. So he’ll just increase it, to defend his lifestyle, while scratching his head at why the trade deficit has nominally widened rather than narrowing as he thought it would when he trashed the dollar.

==================================

Think on the above in light of this:

Fear is the main emotional motivator in any currency collapse, just like it is in financial market meltdowns. And as we saw even just last night, the herd can stop on a dime and reverse course 180 degrees overnight, from greed to fear, based on a single news item.

The initiating spark of hyperinflation (currency collapse) is the loss of confidence in a currency. This drives the fear of loss of purchasing power which drives people to quickly exchange currency for any economic good they can get their hands on. This drives the prices of economic goods up and empties store shelves, which causes more panic and fear in a vicious feedback loop.

The printing of wheelbarrows full of cash is the government's response to price hyperinflation (currency collapse), not its cause. This uncontrollable government response happens in some cases, but not all. Let me repeat: The massive printing that first comes to mind when anyone mentions hyperinflation is not the cause, it is an effect, in the common understanding of hyperinflation which is the collapse of a currency.

Stated another way for the specific case of the US dollar; credibility inflation (financial product hyperinflation) leads to consumer price hyperinflation (collapse of confidence) which leads to monetary base hyperinflation (govt. response).

So what does the supply of money have to do with the catastrophic loss of confidence that is hyperinflation? Yes, the catastrophic loss of confidence drives prices higher. This makes the present supply of money insufficient to purchase a steady amount of goods (USG junkie fix). True balls-to-the-wall hyperinflation requires a feedback loop of both value and volume. Value drops, so volume expands, so value drops more…. Without the feedback loop, you simply get the Icelandic Krona or the Thai Baht. With the USG in the loop, you get Weimar!

.... For all of 2011, the shortfall grew 12 percent to $558 billion, the most since 2008. Both imports and exports climbed to records.

The trade deficit in the U.S. widened in December to a six-month high as a strengthening economy prompted bigger gains in imports than exports.

The gap increased 3.7 percent to $48.8 billion from $47.1 billion in November, Commerce Department figures showed today in Washington. Purchases of goods and services produced overseas were the strongest in more than three years on record demand for capital equipment like machinery and semiconductors.

Contrast this with the message that gasoline consumption appears to be sending about the US economy.

Now let's compare this to China. Marginally falling exports and dramatic fall in imports (my emphasis).

China’s overseas shipments decreased 0.5 percent in January and imports declined a more-than-forecast 15.3 percent from a year earlier in a month that had four fewer working days than in the same month in 2011 because of the Chinese New Year holiday, the customs bureau said today. That pushed the trade surplus for the world’s second-largest economy up to a six-month high of $27.3 billion, the data showed.

I don't really think his religion has that much to do with his obsession with Middle East war.

He's a very outspoken Catholic. I don't know about the rest of the world, but in the US, the Catholics tend to be the least warmongering of the major religions here. So I don't think he's been indoctrinated with these beliefs in his church. I really do believe he's a follower of this "American Exceptionalism" doctrine.

We've been on top of the heap for so long in this country, most people here literally think America IS the world. They think all that oil over there belongs to us. And they literally think the rest of the world hates us because we're rich and free.

FOFOA talks a lot about credibility inflation. Trust me, there's a lot more that's been inflated here than just our credibility. When you've been allowed to live beyond your means for so long, it has some major psychological effects on the people. Combine that with the blatant propaganda in our media, and you have a recipe for disaster. The world view of the average American has been severely distorted.

So although I'm looking forward to Freegold on one hand, I'm not looking forward to it on the other hand. The American people have become so spoiled, the transition to America becoming "just another country" is not going to be pretty. The brain-dead Boobus Americanus species will be as annoying as the walking dead in a zombie movie.

So maybe Rickards has our best interest at heart and he just doesn't want to see Americans suffer. I doubt it. I tend to believe it's more about not wanting his buddies to lose their position of power in the world.

I should probably shut up now before I find myself on the business end of one of his buddies' sniper rifles :-)

If One Bad Adder drops by please draw his attention to this comment and ask him to give us his interpretation of the significance (or not) of this report by Tyler Durden:

Today is the lowest USD volume day since the mid 2009 (which tended to coincide with holiday trading volumes around July 4th) - making today's USD trading volume less than 50% of their 2004-2007 average!

I hear ya on the entitlement front. Over here in the UK, the exact dynamics may not be precisely the same, but the vile entitlement culture creates an arrogant ignorance (what a combo!) no less visceral.

"The paper price discovery mechanism allows the flow of gold into China to not exert the brake force it otherwise would if gold were priced at a floating, physical price. So the paper price mutes the affect of the flow of gold and "allows" China to keep overproducing."

Thanks JR, that makes alot of sense to me. I'm catching up on my reading .... I've been in Cuba, No wifi there yet.

It's a very interesting country. One of the few that hasn't been ruined by corporate america.

Castro's brother has taken over the governence, he has more liberal ideas. The economy is moving into a higher gear with the emergence of small privately owned business.

IMHO James Rickards is to FOFOA/FOA/Another on gold like Milton Friedman is to Mises: Rickads recommends that government monetarism can continue to be in control of future gold vs FOFOA's arguments that human action eventually determines the price/flow.

It's confusing to me that Rickards, after describing complex systems, would recommend another complex system as a solution at the end of the book: US government control over the price of gold and implicitly purchasing power of new dollar by Force Majeure/fiscal policy/Fed intervention.

As far as I can tell his recommendations simplify the system by breaking up the banking system into smaller, simpler units and returning gold into the monetary sphere, and then magically considers this system simple enough to not commit the same mistakes that were inevitable in the past (and very well described in his very book).

Something does not compute - but I don't want to go and speculate about his agenda - I simply don't know enough to do so.

(PIGS countries have been delaying payments for drugs to big pharma, but only for a few years, many many billions of bits of paper outstanding, all counted as 'payments receivable' at FULL VALUE in big pharma's accounts...oh dear).

(LOL, at the same time as not paying, EU govts. are squeezing prices lower, as they can't afford the bills that they're not paying...priceless).

http://online.wsj.com/article/BT-CO-20120207-712664.html

(GSK move cash out of Europe daily to British banks, a quote from their CEO:

"We sweep all of our cash raised during the day out of the local banks and send it to banks here in the U.K. which we think are robust and secure," Witty said, adding: "We've been doing this since early last year and will continue doing so." )

So, yea, the British banking system is safe as houses because the UK govt. is so solid, AAA-rated and all that.

One day these big companies will wake up to reality, that the whole thing is 'unsafe', to put it mildly, and then we're in the endgame. A ruch to the bottom of that upside-down pyramid!

Trade deficit in the physical plane has been widening further and further.

Actually the strong deflation that happened in 2008 has significantly reduced our trade deficit. Focusing fully on the ill-effects of deflation has neglected the fact that the reduction in consumptive binge has done some good for the US.

By focusing fully in the direction of consumption, US will bring about its own demise. If US has been exporting currency for so long, then it has also exported its productive capacities then, because by exporting currency and engaging in a consumptive binge, the nation has gradually eroded its producing capability.

I'm trying to tie these thoughts together with Prof. Fekete's observations in 2010 where he says he does not see an imminent hyperinflation (which was correct, many such as Schiff, Willie etc. were predicting one).

One important point he observes is that all hyperinflations upto now have happened in the context of a war, where stockpiles of commodities were destroyed or used up, where production facilities have been destroyed. We don't have that now. There will be a squeeze on the producers, producers will go bankrupt...

Does FOFOA and others see something imminent? I guess the war drums against Iran has been going for a while now....

If I may, one point about hyperinflation: Hyperinflation is a complete loss of confidence in the purchasing power of a currency.

As such, the triggers can be numerous, and there are many correlations with wars, but no causality.

I believe FOFOA explains it best when he says that it is up to the producers to decide what the dollar is worth to them, and as such whether to accept it and in what quantities in return for their goods.

In my opinion, trying to gauge the timing is almost pointless given that we cannot fathom the confidence position of the producers/giants that really count. But again, in my opinion, the slide will start like any other day at the office, with the big difference being that this one day special day, the confidence in the dollar would have eroded enough that some major funds/giant producers/etc will choose to "get out of their dollar trades temporarily, just in case" where a month before they would not have.

Then one fund sees the other doing it, the avalanche starts, and the Fed intervenes. Of course, because loss of confidence in the dollar is what caused the "protective out" to start with, more dollar injections just erode confidence more and the slide starts... Just a likely scenario. But timing? That depends on the big market participants really, and we can only guess at it.

Larry Edelson of Weiss, Unconventional Wisdom and Money and Markets says he believes that China and the USA are secretly planning a devaluation of the dollar but will wait until the European situation is more stable...or explodes. He reveals these thoughts in one of those horrible info/videos that one cannot fast forward nor reverse. Larry has had some good thoughts to pass along over the years so for anyone who was going to waste 45 minutes watching it...I just saved you from having to do so. Oh and there is a product to buy at the end..

"But timing? That depends on the big market participants really, and we can only guess at it."

It was either very late last year or very early in this one that I asserted to Texan that we would see the paper gold markets come a cropper-aka Freegold- within three years. I still hold to that.

If the $IMF system is truly as decrepit as it appears-at least as it appears to some of us-there isn't enough duct tape, bailing wire, and Elmer's to hold it together for very much longer. And there is some numeric threshold, I don't know exactly what it is- perhaps we can put our collective minds together and come up with an approximate, if not precise, figure- such that when global dollar trading volume falls below it, the transformation to the new system will markedly accelerate.

"However, these gross notional figures tend to overstate the true risk exposures, because many outstanding positions are offsetting. For example, the estimated market replacement cost of outstanding positions as at December 2010 was around $21 trillion – less than 5% of the gross notional amounts."

From the Wiki on Mark Carney:

"He worked on South Africa's post-apartheid venture into international bond markets, and was involved in Goldman's work with the 1998 Russian financial crisis."

"Goldman's role in the Russian crisis was criticized at the time because while the company was advising Russia it was simultaneously betting against the country's ability to repay its debt."

I'm thinking Freegold must be quite a ways down the road as we reluctantly await the burn of derivative paper.

It seems pretty clear that the G20 and BIS are working overtime to facilitate risk management of the whole process by the end of 2012.

Mark Carney looks like a very capable man and sits on the Board of the BIS as well as chairing the CGFS.

I had a silly thought that ex-Goldman guys are required to pay some penance by overseeing the drudgery of holding the house-of-cards together and producing turgid reports such as this one.

Anyway, I would be remiss not to notice that a new chairman of the CGFS has been appointed to succeed Mark Carney, who is himself moving over to chair the Financial Stability Board at BIS.

One William C. Dudley will now chair the CGFS - another ex-Goldman guy, who would have guessed?

http://www.bis.org/press/p120109.htm

It does add a bit to my silly penance hypothesis but who's counting?

So, how many readers here think that derivative paper is going to burn anytime soon?

once all these companies run away from the pound (or dollar), that alone could be enough for a serious crash. In light of all this, the Euro has been extraordinarily strong.

John Fry,

the problem with netting out derivatives contracts is that this works out only if there is no counterparty risk between the banks. If one of them fails, what matters for their counterparties, is the gross exposure. Netting them out is kind of a fair weather estimate.

This probably tells you that the game can go on for quite a long time, but when it eventually blows up, then it is devastating.

Blogger Jesse had some interesting thoughts on Sinclair's article here.

He says: if a major counterparty in this daisy chain fails, the notional netting can become 'cataclysmic,' and enormous losses can be realized, especially if there are linkages to the commercial credit and banking systems. And this is where 'mark-to-myth' and bailouts come in

Aquilus,

Thanks for your thoughts. I was pointing out that some of the correlated situations for a hyperinflation to occur aren't there.

I think the context is also key towards knowing when it will occur. 'If it will occur' is where FOFOA's mammoth essays come in :).

I don't want to go so far as to say Jim Rickards is a shill, BUT, when looking at who his 'masters', errr I mean 'clients' are (Uncle Sugar, DoD), then I would have to say he is more than likely a plant. IMHO

Similar to PIMPCO or NAR or the OG; they is all just talking their book homeys. Nothing can be relied on anymore. Believe in yourself, believe in Freegold. It's a comin...

There certainly IS a "calm-before-the-storm" impression in here, with the way the short T's Yield has been "meticulously" ramped up ...and reduced Vol on DX - I'd not really want to draw ANY conclusions "short-term" here ...except maybe that short T's are MORE of a Dollar than DX (trading) is.

It was NEVER a good idea to have $US wearing both an International AND Domestic Hat (the exhorbidant privilige) Unfortunately, that (what?) 70Yr "free-lunch" is on the cusp of being called to account - in the most unusual and unpredictable circumstances IMHO.

Unfortunately, that (what?) 70Yr "free-lunch" is on the cusp of being called to account - in the most unusual and unpredictable circumstances IMHO.

The currency swaps are one of the factors that people won't get until it's too late.

Factor the marginal effect at around 10:1 and then there's the hidden factor - what currency are you pricing in if you have a bilateral currency swap? It may reference USD but that aint the same thing as settling in USD.

Agreed on the counter-party risk and the eventuality observation. I wrote the following prior to reading your comment, so I'll add that this BIS report explores sharing that risk in various ways via linked CCP's.

To meet the mandate of central clearing of standardized derivative products the world's central banking representatives identified on page 27 of this paper are developing an expanded architecture of central clearing.

I understand the concerns of a "cataclysmic" event being possible, but I'm more interested in what the BIS is doing to mitigate this risk, and how effective their proposals might be. The small shocks we have experienced thus far have informed the need to improve the existing system.

From page 1:

"Central counterparties (CCPs) will play an important role in the financial architecture emerging from the recent financial crisis. The G20 Leaders’ commitment that all standardised over-the-counter (OTC) derivatives should be centrally cleared by the end of 2012 is intended to increase the safety and resilience of the global financial system. Achieving these objectives depends importantly on the arrangements through which market participants obtain access to central clearing. Such arrangements could include increased use of existing global CCPs, the establishment of domestic CCPs in a number of jurisdictions, and the possible construction of links between CCPs."

Reading the report doesn't instill a huge amount of confidence because there are so many unknowns elaborated using words like: "may", "if", "potential", "possible". If one were to highlight the wavering concerns about; direct vs. indirect access, domestic vs. global clearing, linkages between CCP's and other topics, at least half of the report would be yellowed out. There is quite a bit of vagueness at this late stage of the game considering a 2012 deadline for these changes.

On the other hand the report clearly identifies the concentration of risk inherent in existing access criteria and the downside of the largest global dealers dominating the arena. I could have used a better word than "turgid" to describe this report, so I take that back. The kind of architectural questions they are considering look like they will actually decentralize the system of clearing, reduce the overall risk, enhance multi-lateral netting and provide greater access to services overall.

It seems to me that current concerns regarding cataclysmic outcomes in the derivative world are based on the complexity and risk in existing bi-lateral netting. This report outlines a new system being designed to overcome those concerns. It appears to be the highest level of thinking on this matter.

Maybe it's closing the barn door a bit late but it is a very rational response to a bad situation.

My curiosity centers on the Freegold thesis that there is going to be some kind of judo-flip in the world financial system as the dollar reaches the end of its timeline. If anything, this BIS report indicates significant planning to facilitate derivative trading at the same time as risk mitigation is enhanced.

Not that those two things are mutually exclusive, but it does give one pause to wonder about how simplistic it may be to think that the BIS has a couple of trump cards up its sleeve and will play the "big hand" at some unforeseen date.

As I have written on many occasions, I do not consider myself a "gold bug." So where necessary, I am going to broadly refer to three fundamental views as "the gold bug view," "the mainstream view," and "the FOFOA view."

[...]

I think Bron's "mainstream view" suffers a little from the same thing that all mainstream views suffer from – the 40-year commoditization of gold. This view holds that gold is more or less just like any other commodity rather than the systemically vital FX (foreign exchange) wealth reserve asset that it actually is. Last year Bron quoted Jeffrey Christian in a post written in defense of Christian's "100:1" comment. I think this quote that Bron used from Christian's CPM website really reveals the prevalence of this view of gold as just another commodity:

"This article may help to clarify the complex world of commodity banking, in which gold, silver, and other commodities are treated as assets, collateralized and traded against. When we explain these processes to clients, we often refer to the same mechanics as they are applied to deposits, loans, and assets by commercial banks in U.S. dollars and other currencies. Banks treat their metal deposits in much the same way as they do deposits denominated in money, as the reserve asset against which they lend additional money to borrowers."

So no big deal, because we're just talking about commodities here, not money, right? And thanks to this view, gold still trades precariously (without a safety net) inside a banking system similar to other FX currencies – dollar, yen, euro – with one notable exception. It is the only one without a backstop, a lender of last resort, a Central Bank. This would not be a problem without the expansionary force of fractional reserve lending, even at a conservative ratio.

[...]

Okay, now that you hopefully have a new view of the valley below, for now we can call it "the FOFOA view," let's take a look back at the two other views with which I started this post. The mainstream view is blind to how gold is different than all other commodities in that its lack of a real lender of last resort in a fractional reserve system, should the interbank lending market freeze up, could bring down the entire global monetary and financial system.

And then there is the gold bug view that suspects the Bullion Banks, at the behest and under the guidance of the CBs, must be gaming the system in order to skim physical gold that they eventually need to ship back to the CBs. But then the FOFOA view is that the system itself is, and always has been, the culprit. And that the bullion banking system must and will revert to a non-fractional, non-lending, 100% reserve banking system. Not the fiat banks. Just the Bullion Banks. The CBs demand this, as Another told us a long time ago, because physical gold is cornered by real wealth at these prices, and they (the CBs) will not give up any more of theirs.

Does anybody know what a fair price would be to have a 22kt gold ring made containing 1 troy oz of gold using the current market price $1775/oz? I am looking to use a local jeweler rather than a jewelery chain.

The ring would have to be cast and then given a hammered design.

Also same question for 1.5 oz instead? Should labor costs increase significantly or moderately for increased metal content?

Wolfgang Schäuble, the German finance minister, publicly reiterated his government’s insistence that an increase was unnecessary, saying it would create “disincentives” for countries like Italy and Spain to continue reforms.

“Let me be clear,” Mr Schäuble said. “It does not make any economic sense [to take measures] which would neutralise the interest risk in the eurozone, nor endlessly pumping money into stability funds, nor starting up the ECB printing press.”

Davos Sherman posted a couple of videos today on his Psychopathic Economics Blog that really were interesting, especially the 2nd video. The thing that jumped out at me was the graphic showing global gold reserves and India's gold holdings at the household level. Wow! They certainl appear to be primed for the post $IMFS world and Freegold! That is a lotta stock than create a lotta flow!

A colleague of mine suggested the typical person in India would never sell their gold because it was "in their DNA" to hold gold. I agreed with a caveat, they aren't likely to part with their gold at the current price. The temptation to part with a small fraction of their Freegold to dramatically increase their standard of living will be very tempting IMO.

So now the Bundestag as well as the Greek parliament has agreed to the latest Greek bailout package.Both the Greek and German population are largely opposed to this bailout package...

After reading this blog for so many years, I'm not surprised. Under the $IMFS everything will be done to save the system. Public sentiment be damned...

Question is, will this be bullish for Freegold, or will this contain the crisis for now and kick the can further down the road? And what are the consequences for the derivatives? What will the actions of ISDA be?

As long as we're in this limbo with no willingness to instigate Freegold nor willingness to undergo the classical $IMFS correction mechanisms of inflation or default, I honestly fear for the well-being of the European people (yes, both Germans and Greeks).

...and speaking of which ($IRX) todays Auction results here - http://www.treasurydirect.gov/instit/annceresult/press/preanre/2012/R_20120227_1.pdfstill showing 4+ times Bid-to-cover ...and which also saw a small uptick in Yield.I wonder what happens to the 3+ unsuccessful bids being turned away from the door EVERY WEEK nowadays? (in this case $110oddBil) ...OR are they simply figment$ of the Primary Dealers imagination?

If I understand anything from what this blog is all about, then the plan has always been: the ECB must maintain the banking system (not individual banks but the system) intact.

It is. With the LTRO it is providing enough "lead" in the money balloon for the next 3 years by exchanging all the bad debt for cash "at par" as FOA/Another predicted they would.

And based on Basel III specs, that money better stay with the ECB based on the new capital requirements: ergo, most money re-deposited with the ECB.

On the other hand, the ECB is doing everything it can to prevent future deficits. Greece is/will be and example of what happens if that's not taken seriously, and I also (like Victor) agree that they will default inside the euro.

How many more after that, who knows, but the future deficits will be addressed.

When that happens, more than likely the monetization of current debt will serve as both a reason to devalue the euro to (one time only) help the weak countries (strong countries can re-raise salaries, weak ones will not), as well as clear the banking system and have it ready for the next phase.

In the mean time the $ system can continue its confidence deflation and value debasement to it's ultimate goal.

Meanwhile - further out in the curve the 7 Yr 1.4%ish coupon B/C @ 3odd sees a lot more involvement by parties other than PD's. http://www.treasurydirect.gov/instit/annceresult/press/preanre/2012/R_20120223_1.pdf

Can't for the life of me see the attraction in these longer-dated maturities ...unless the aforementioned "disappointed" bids in the short end need a home ...for the time being.

Maybe a bit like the three little Pigs - where the "straw" house is Bond, the "sticks" house is the Notes ...and the "brick" house - the bills.At least they DO have a roof over their heads ...until the Big Bad Wolf comes a-knockin!

Out of curiosity (I have not looked), but would 1.4% on 7yr cover buying the cheap puts the Fed is rumored to be selling and thus have a decent hedge for the risk? (I mean nominally, they will get their $)

With the LTRO it is providing enough "lead" in the money balloon for the next 3 years by exchanging all the bad debt for cash "at par" as FOA/Another predicted they would."

Are the ECB exchanging bad debt for cash? I thought the banks were getting cheap credit from the ECB, by pledging their longer term assets as collateral, alongside their own good names. Effectively getting a maturity transformation on their lent-long assets, ensuring they are liquid. I wasn't aware these assets they're pledging are known toxic waste, with this being done as a ruse to see the ECB stuck with it all later? Unless I misunderstood your comment, this is what you're saying is happening yes? Which is very interesting if it's the case.

I thought it was only the Bank of England and the US Fed that were taking turds from the banks and turning them all into crisp new bills.

On Tuesday the ECB approved measures to widen the collateral acceptable to post against its unlimited offering of three-year loans. The broadening of collateral means that the uptake for the LTRO could be much greater. The original LTRO saw banks take €489bn in three-year loans from the ECB at a low 1.00% rate. The Financial Times estimates that broadening the acceptable collateral could boost uptake by €200bn. The total pool of eligible collateral is near €14 tn.

One central bank noted that, in effect the provision means that they will accept BB- credit rating as collateral when previously they would only accept BBB-."

Perhaps somebody would like to comment on the following question: We know that at the infamous June 2003 FOMC meeting, one of the options presented was that the Fed writes swaps that allow others to trade a fixed coupon for a floating rate one, thus allowing them to offload their interest rate risk at the Fed. Do we have any indication either that such a policy is or that it is not in effect as of today?

Clyde Frog, burningfiat,

the ECB explicitly lowered the requirements on the collateral before the LTRO started. The LTRO can also be gamed by securitizing some debt, then having it insured, and finally use it as collateral. So I would not assume the LTRO is a 'clean' liquidity operation. In my view, what matters is that the perceived risk of government debt gradually increases.

Paul Brodsky's latest missive, as seen on Zero Hedge,(if you don't happen to get QBAMCO's letters,) is TAILGATING the Warren Buffet post in SPADES. Go havea look. He is FOFOA's one clear cut advocate in the Hedge Fund space.

As per last Fridays 7 Yr - looks like there's not a lot of "public" interest thereabouts. ...and even so, they'd (Fed) probably need to provide real cheap Options cover to try and woo Joe into them.With the Bid at or slightly above Par, regular Cost-of-Carry would wipe out the meagre 1.4% Coupon in a twinkling ...IF there can be found a AAA counterpart.

Different matter for foreign CBs etc. as they'd just PRINT their local currency to acquire these ie: contented to remain naked? IMHO.

I think finding a price like that in the US would be next to impossible given the cost of overhead.

I doubt any trustworthy online Indian jewelry dealers export to the USA?

What I've read at Kitco is that 100-300% markup in gold jewelry is normal in the USA. This might be reasonable for a very small piece by metal weight in order to meet overhead. But given the relatively simple design and heavy weight I'm looking for, 100% over spot does not seem reasonable.

>>> "What makes you think that the BIS wants to mitigate the risk?" <<<

Mostly because I actually read the report and that's nearly half of what they explored - risk management and risk mitigation via a new global infrastructure.

All I can say is, read the BIS report and judge their intentions for yourself. I doubt they're running a smoke-and-mirrors show over there, using guys like Mark Carney to distract the audience, (great name though, huh?).

I suppose there could be some elves or something, higher up, shielded from mortal view, who are actually running things, but that's one long stretch of the imagination.

Is it your contention that the Bank for International Settlements isn't concerned about improving the present derivative-clearing infrastructure, in order to mitigate systemic risk, as identified in nearly every other paragraph of that 33 page report on access to CCP's?

http://www.bis.org/publ/cgfs46.pdf

I'm not saying that I think the recommendations or architecture outlined in that report will work. That's way above my pay grade. All I'm saying is that it sure looks like they're working hard on the problem and it seems quite rational to me.

With the BIS is at the epicenter of things, perhaps they really do want to resolve the outstanding derivative problems prior to moving on to better things.

@WolandThanks for pointing out the Brodsky piece. I would have missed that. What I wouldn't have missed, however, is OG's shameless and continued promotion of a failed system that enslaves and abuses those it purports to serve. I have known that since the end of the Tech Bubble which, in fact, helped to awaken me to the criminal element that is Wall Street, that is OG.

A traitorous group deserving of harsh judicial treatment (and hopefully equally harsh punishment of the rock breaking or even capital type).

The path to Freegold must continue and the more the 'Shepherd' tries to herd, the more convinced I am of the outcome (and of course thanks to FOFOA, et al for keeping the path well lit).

the right question to ask is where the enormous counterparty exposure in the OTC market comes from. This was not always the case. It started at some point in the 1990s with a rule change (national banking regulation).

When a bank holds a loan or a bond (other than government bonds, LOL), they have to set aside a certain amount of capital. Before 1990, the same was true for any sort of OTC contracts with other banks.

With the new rules, if a bank has OTC contracts with several other banks whose risks offset each other, they need to hold capital only for the net exposure. Say, if JP Morgan has bought a call on Brent oil from Barclays and sold the same type of call on Brent oil to HSBC, they need not set aside any capital.

Without this netting of exposures, most of the OTC world would simply be pointless - not enough yield per invested capital. Only netting the exposures makes the huge leverage possible with which all these derivatives positions become profitable (or at least tempting).

Depending on the specific contract, it may or may not involve marking its value to market. It may or may not involve posting some collateral (to placate the counterparty, not the regulator).

I know that the S&P 500 puts written by Berkshire do not require collateral, but are marked to market. The CDSs or mortgage bonds written by AIG did not require collateral, but were marked to market, too.

Now if you wish to disentangle the OTC derivatives market, there is an absolutely easy way of doing it. Require the banks to set aside capital before their OTC exposure is netted off. You can phase this in gradually over 10 years if you like. So in year 1, they need capital for 10% of the gross exposure, next year 20%, and so on.

In other words, why not go back where you are coming from? Everything else looks like a smoke screen to me.

By the way, what the ECB is doing these days, is basically what I wrote above. It is just based on fear rather than on regulation. They keep the pressure on the commercial banks (by letting PIGGs bond yields rise gradually). The banks borrow cash directly from the ECB rather than from other banks, and they keep their reserves at the ECB rather than investing them elsewhere. So I guess the OTC derivatives market would slowly dry up if this keeps going.

Last year my daughter got married, and I wanted to gift her a traditional gift of gold. I went to my local coin dealer that I have dealt with for some time and asked him about his purchases of gold jewelry. He let me look through his box of purchases, and I found the exact right thing. It was a great gold pendant with a 1/4 oz eagle set in the middle. He let me have it for his normal bullion price, which was only a few percent over spot, as he would otherwise have to ship this all out for scrap. If you do not want a specific custom designed piece, this may be something to look into.

More grist for the mill in the discussion about the BIS and derivatives regulation.

http://www.voxeu.org/index.php?q=node/7672

Helpful and welcome as recent moves have been, a more fundamental rethink of the Basel framework for determining minimum capital requirements for banks is needed. Basel III is just a quick and dirty repair job, consisting of patches applied to fix things that went visibly wrong during the past four years.

But it involves no reconsideration of the structure of a fundamentally flawed system that is opaque and far too complex. The risk weight system at the core of the approach for calculating capital charges needs to be scrapped in its entirety and a more coherent approach to exposures arising from derivatives, notionally in excess of $600 trillion at the end of 2010, must be found.

Basel’s main flaws

The central problem is that banks have almost unlimited scope to arbitrage the system by reallocating portfolios away from assets with high risk weights to assets with low risk weights, not least by trading derivatives. Given their powerful incentive to save on capital costs, they use this scope abundantly.

New capital charges (eg the surcharge for Globally Systemically Important Banks) and stricter calibration (ie higher required ratios based on ‘risk weighted assets’) just encourage more of the same.

Briefly:Iran's removal from Swift presents opportunity to transact in gold for oil at 0.1 g per barrel. Run on physical starts leading to ultimate 'paper' $ value for gold at... 0

Some snippets:For if Iran asks for 0.1g PHYS Au pb, (and thus values PHYS Au at $31,100; 311 barrels per oz Gold)), the world is in for a mind-blowing, hair-scorching ride, as the deceit, counterfeit and fraud is blasted out of this paper-monetary-system to be replaced with true valuations and asset-price integrity, as markets revalue worthless paper contracts to (almost) zero and real assets to their true worth.

more...

Consider how you would react to information that Iran was asking for a paltry 0.1g PHYS Gold pb/ per 311 barrels per oz Gold? Is there one among you who would not rub their hands in greedy glee at the untold riches to be made in this glorious arbitrage opportunity? "Quick! Sell everything, beg-steal-borrow, lay my hands on every penny I can! Spend every penny on buying more Gold at the $ market price (say $1750)....ok, that's 31.1g per oz; at 0.1g Gold pb...that's 311 barrels of Oil for $1750....can't be right, triple check calculation...it IS bloody right...I'm going to be a billionaire!!!..." Good luck! Your billionaire-dream will endure about as long as it takes a piece of A4 to burn[3]. (Ok, slight exaggeration, a bit longer than that...) But hold that excitement as you hurry off to check Gold's spot price, as you pray that you're ahead of the pack in identifying this arbitrage opportunity of a lifetime, as you pray that Gold's price hasn't risen too far yet, hasn't eaten too far into the billions that await you... Then watch in stupefied amazement as you see before your eyes the spot price of Gold fall, fall faster, increasingly faster, fall flat on it’s backside. FALL?!

What happened? You just witnessed the PHYSICAL Gold bank run. And you just witnessed the uncovering of the 'value' of Comex and LBMA and ETF paper gold. But stay with me, there's more. You are about to witness the reassignment of PHYSICAL Gold to a fully-priced TRUE value; a new equilibrium, a ‘new normal’!

It does seem interesting but counter to what I understand the role for gold under the Freegold system. Transactional unit instead of wealth reserve.

Either way. He has another article I am looking at regarding the OG and his stance on gold. The more I read about the OG the more I realize he's just an insider. And I ain't. At this point, he is just starting to sound like an OF (Old Fool), however.

Thanks for your reply. I think I'm starting to get it. I didn't understand anything about your original comment regarding Basel II, so I read the wiki summary and then this non-technical paper on the problems with Basel I and Basel II. http://tinyurl.com/7bku7d

With that layman-level of information, I can grok the idea that they really aren't trying to fix anything at a fundamental level. Which would mean that they're just buying time, but as you note, it won't be very pleasant when it fails. I wonder how much of it is all vapor-wealth at this point.

@ costata

That article sure is timely.

The complexity of what the Basel recommendations were/are trying to fix seems to be exacerbated by their capital/risk formulas.

This quote kind of nails it.

"The risk weight system at the core of the approach for calculating capital charges needs to be scrapped in its entirety and a more coherent approach to exposures arising from derivatives, notionally in excess of $600 trillion at the end of 2010, must be found."

Thinking about how computerized the process inside the banks must be, sure makes me wonder how stable things are, the garbage-in and garbage-out thing. Are we reaching the pinnacle of complexity, a system that can't even be regulated?

Peter Trzaska is well known .. he is a regular and appreciative reader of FOFOA, he sometimes comments here under the handle of 'Dr Peter T'. Those two articles on asymptotix are good representations of his views, imo. eom.

I think you get this but for everyone's sake, hopefully we all appreciate the point that its not about derivatives per se, but the gold market (of which the gold market is a part). And that preparing for the upcoming transition involves preparing for the fallout of the $IMFS , which means rpeparing for the fallout of the derivative system.

Today, the big money is all hedged. Almost no one with a sizable account holds only long position bets. The market isn't balanced by 50% betting on one side and 50% betting on the other. It is balanced within each portfolio through leveraged hedges. And it is the evolution of these hedging instruments that has both extended the life of the dollar like a steroid injection and at the same time, sealed its fate.

During Bretton Woods, foreigners held "good as gold" dollars, "the hard currency", as a hedge against their local currency risks. But once those paper gold derivatives we like to call FRNs grew too numerous, all bets were canceled, conversion denied, and those who still held the paper lost out in the immediate devaluation. The same thing happened 38 years earlier... and the same thing is happening 38 years later!

In the 1970's the liberated physical gold market proved to be an excellent hedge against both currency and default risk. Then in the 1980's we were treated to an amazing growth spurt in electronic exchange traded futures and new global exchanges trading these derivative hedges, ultimately netting more than 90 different futures and futures options exchanges worldwide.

In the early 90's, the dollar saw its match as the Euro was taking shape. To counter this threat it promoted derivative hedges as a way of insuring dollar dominance. These hedges, including gold derivatives, only served to leverage the entire dollar system beyond its ability to serve as a real fiat money system. The whole dollar landscape become just a trading asset arena, evolving away from any meaningful currency use to trade for real goods. It can head in no other direction now because our local economy, the US economic base, cannot possibly service even a tiny fraction of the purchasing power currently held in dollars worldwide.

We are now at the "end time run" in fiat dollar production that will soon crush all hedging vehicles. One item alone, physical gold, because it is the main wealth asset behind the next currency system (see: Central Banks), will outrun everything by a wide margin. No matter the derivative's hold on it! Just like gold to the pre-'71 dollar, paper and physical will soon blast off in opposite directions.

Paper Promise Hedges

The purpose of modern paper hedging instruments is no longer to simply balance a portfolio with opposing bets, but it has instead evolved into a risk dispersion game. Like an insurance company, the writers of these instruments issue highly leveraged promises of protection from the risks inherent (and inevitable) in an unstable and unsustainable system

The two main risks that are hedged today are default and currency risk. The primary instruments for hedging these risks are credit default swaps (CDS) for the former and interest rate swaps (IRS) for the latter. But the sheer number of promises that have been issued (for a fee) has become so large that it has now become the market driving force.

Think about this. The hedges are now guiding the markets. What do you think will happen when they all of a sudden fail to function? The financial world today turns on dollar assets that are all hedged, not just pure bare holdings! Block the hedge markets from performing and the dollar itself is unseated.

Today's Fed policy of saving Wall Street at all costs is in direct opposition to the risk transferring dynamic of derivatives that has kept the dollar alive. Contradictory forces! Of course the alternative would have been almost as devastating, but that's the problem with Catch-22's.

The dollar's structural support system, its very skeleton, its integrated hedging operation has failed. It is no longer a matter of time, it is only a matter of recognition.[...]

Today's dollar is so brittle that it requires a hedging mega-structure so leveraged, so large, and so unstable that it must... MUST collapse under its own weight. Some of it will be replaced with titanium implants (monetized) in an effort to save the banks, much like AIG was "rescued". Other parts will be dumped into a market that wants nothing to do with them in an effort to extract pennies on the dollar. Net effect -- dollar disintegration.

A fiat system cannot exist without a functioning counterweight, and today's mountain of derivatives is failing at this task.

So where does gold fit into all of this?

Well, the gold market is part of this massive derivative complex that is currently counterbalancing and supporting the dollar.

[...]

FOA: What doesn't seem to be obvious is the "why for" the paper market grew so large. It grew to dominate because world wide dollar expansion reached its "non hedged" peak. In other words, the dollar's timeline was ending as its ability to produce non price inflationary economic gains came into sight.

In order to push dollar holdings further, international players needed and purchased "paper financial hedges" to balance their risk. Within their total mix of derivative hedges were found "paper gold price hedges"; modern gold derivatives. The important thing to remember is that these positions are not and never will be used to demand physical gold. They are held to buffer financial and currency risk associated with holding any form of dollar based asset. To work, these items don't need to really perform "dollar price movements" in the holders favor as much as they need to be present in the portfolio to act as insurance stickers. In that truth, these paper gold positions act like FDIC insurance at our banks.

While so many of our gold bulls salivate at the prospects of some player calling for delivery and driving the gold derivatives market to the moon; it ain't gonna happen! Our world of dollar based gold derivatives has grown so large and become so integrated into supporting (hedging) international dollar assets, the central banks will band together to crush any delivery drive.

[...]

How many postulated, even just a few years ago, that with the fed expanding the money supply by a year to date "one trillion"; that paper gold could not reflect this inflation? This only further confirms that this form of market "hedge" is failing to function for its owners.

Paper gold derivatives became a major force in allowing this last, end time demand for dollars and subsequent surge in its value. This is why Another said it would run way up, even while being inflated, before the end would come.

FOA: It's no accident of nature that our world monetary structure embraced derivative expansion as it has over the last ten or twelve years. I think we can say that this modern creation of risk management began around 1988 or so. (It's funny, but I remember living in San Diego and reading a paper about a gold company called Barrick that just started only a few years earlier?)

The record of derivative evolution meshes seamlessly with the recent need for supportive dollar currency measures; a strategy of maintaining a failing system that was ending earlier than expected. Truly, in 1990 no one was going to carry the dollar any further, waiting on the endless delays of Euro creation, without some way to hedge risk. We had hit the end of the dollar's timeline too early; we had missed the mark.

The US could not physically save the dollar then, neither with gold backing nor the production and sale of real goods. The only answer was to let the dollar kill itself while you create an illusion of risk dispersion in the form of derivative protection; a form of backing if you will. With this "illusion of risk dispersion" in hand, called a derivative hedge, the world currency system and its denominated assets, continued on. This "just in time risk management" was and is adopted into every present day currency that carried the dollar as reserve backing.

It's no wonder that Alan Greenspan has commented so often on the need to control derivatives yet has no workable plan to counter their function. Truly this dynamic was created to counter his function and few can understand this! In effect, the dollar was placed on a one way street that required it to be inflated into infinity. All as a means of protecting dollar originators; the US banking system. Dollar leverage, that is actually US liabilities, is now built up endlessly. This all points to a nonstop, end time need for an uncontrollable inflationary expansion by our fed.

In our first real test of "just in time risk management" our Fed is and will provide buying power to gobble up any and all risk, "just in time" and without end. It seems that when our "free market" created assets are threatened to be exposed as an illusion of value, Americans embrace any and every form of government socialistic bailout known to man. Perhaps, our much exampled form of a "free market driven economy" was little more than "free as long as derivative risk is covered with social money"... "just in time".

Now, we will follow this trend in an accelerated fashion, until all derivative process is exposed as nonfunctional outside a massive hyperinflationary policy. Our wealth is and was nothing but an illusion of safety and created in our own minds. Within this mix is contained all the various gold derivatives we have come to love so well. The future failure of a gold contract does not mean that the long holder gets his price or his underlying good; it means his derivative fails to shelter his exposure by matching his other loses. In terms closer to a gold bug's heart; paper gold in any form will not match up anywhere near the price of free traded physical gold.

We are on the road to high priced gold and under priced derivatives. The same thrust will be apparent in all financial derivatives. Further, we are on the road to a fully "cash settled" contract market for gold; here in the US and abroad. In the time ahead, just before serious real price inflation rears its head, look for most all dollar based contract commodities markets to be restructured into pure "undeliverable" cash settlement markets. Markets that, also, many gold producers will be forced to use. The day of big premiums on gold coins and bullion is coming and coming fast.

. A grand hyper inflation of prices is now directly ahead on the trail. It should be ushered in with a large "crackup" in the currency derivatives market. Once this event is "in process" the paper gold markets will quickly rush to discount against physical gold. A discount that will break our gold market pricing and physical allocation system.

==================================

Because as discussed above is that paper gold is not really used to demand delivery but "to buffer financial and currency risk associated with holding any form of dollar based asset."

paper gold is hedge everyone ran into amidst the dollar's failing timeline, but this illusion of safety will fail and reveal the truth about "wealth" held in the $IMFS.

Within their total mix of derivative hedges were found "paper gold price hedges"; modern gold derivatives. The important thing to remember is that these positions are not and never will be used to demand physical gold. They are held to buffer financial and currency risk associated with holding any form of dollar based asset. To work, these items don't need to really perform "dollar price movements" in the holders favor as much as they need to be present in the portfolio to act as insurance stickers. In that truth, these paper gold positions act like FDIC insurance at our banks.

[...]

The record of derivative evolution meshes seamlessly with the recent need for supportive dollar currency measures; a strategy of maintaining a failing system that was ending earlier than expected. Truly, in 1990 no one was going to carry the dollar any further, waiting on the endless delays of Euro creation, without some way to hedge risk. We had hit the end of the dollar's timeline too early; we had missed the mark.

The US could not physically save the dollar then, neither with gold backing nor the production and sale of real goods. The only answer was to let the dollar kill itself while you create an illusion of risk dispersion in the form of derivative protection; a form of backing if you will. With this "illusion of risk dispersion" in hand, called a derivative hedge, the world currency system and its denominated assets, continued on. This "just in time risk management" was and is adopted into every present day currency that carried the dollar as reserve backing.

[...]

Now, we will follow this trend in an accelerated fashion, until all derivative process is exposed as nonfunctional outside a massive hyperinflationary policy. Our wealth is and was nothing but an illusion of safety and created in our own minds. Within this mix is contained all the various gold derivatives we have come to love so well. The future failure of a gold contract does not mean that the long holder gets his price or his underlying good; it means his derivative fails to shelter his exposure by matching his other loses.

This Agora financial ad has some interesting info on Iran/Saudi impact

http://bit.ly/yfd9Hi

The convergence of global financial instability and the Mideast powder-keg - one could easily see the paradigm shift in the monetary plane occurring as the result of an explosion in the political plane.

I just wanted to say that all the central counterparty stuff about the OTC derivatives does not address the original problem. One was of understanding Basel III and all this is perhaps that at G20 level, an agreement is not possible because both US and UK would not want their derivatives to be reigned in.

Some in continental Europe might want to fix it and even know how to do it, but unfortunately they have to wait until the old system blows up.

One of the key problems with the banking system is that they focus on nominal returns. They are totally disconnected from anything that most people would recognize as reality. For example, in Australia the banks hold around 1 per cent capital to back their residential RE loan exposure. They "insure" sub-prime mortgages with insurers who hold three quarters of one per cent (that's 0.75%) of capital to support their exposure to these insurance policies.

The risk weightings under the Basel (Fawlty) rules are simply a joke. Zero risk weighting for sovereign bonds. Virtually zero for residential RE mortgages. Take a look at the numbers in this ZH post. London, Paris, Denmark, Norway, Sweden, Austria, Switzerland and on and on. Crazy overvaluations and private debt levels on residential RE.

…While the world has been laser-focused on the woes of the heavily-indebted PIIGS nations for the last couple of years, property markets in Northern and Western European countries have been bubbling up to dizzying new heights in a repeat performance of the very property bubbles that caused the global financial crisis in the first place….

It is simply mind-boggling that the world is back to blowing massive property bubbles so soon after the U.S. and peripheral European housing bubbles popped and caused such incredible economic carnage….. The 2008 global financial crisis should have taught everyone their lesson once and for all, but we are clearly living in a world filled with excruciatingly slow-learners. More punishment is coming our way and will keep coming until we finally learn from our mistakes. Sadly, by the time we learn from our mistakes, it will likely be too late.

It’s not “mind-boggling” at all if you understand how the collateral that supports this system is priced. The pricing mechanisms have nothing to do with “value”. This quote from FOA, in Gold Trail 4, says it all IMO.

We all have trouble understanding how there is no value known for physical gold. Yet, if we look at another market we could grasp this issue. Take American real estate:

We all have an idea what that house down the street sells for. But consider that that price does not reflect the true value of the physical house. Just watching the 30 year loan rate tells us where most home prices are going.

I think (as an unreal example) almost every person would agree that if the Fed went into the market to buy any and all 30 year house loans until the rates fell to 1%,,,,,, home prices would explode! Conversely, if all credit for houses was shut off,,,,,,,,, cash deals only,,,,,, home prices would crash!

Note the language: "an unreal example". As in "no one would be crazy enough to do that". Of course with the benefit of hindsight we know that they were/are "crazy enough" to do precisely that. Here's the good news for physical gold holders from that FOA quote (my emphasis):

How does this reflect on our gold market? We can see where a cash house is worth one price while a credit house is at a different level. The physical is the same even though means of trading and owning it generate an illusion value. You don't truly own a house brought on credit, in this light we can see that you live in something actually owned by the bank. But, you benefit by trading it if the price rises. Actually, currency profits from ownership illusion.

Our gold market has been in this same illusion fog for decades. The gold so many in the industry think they own and trade is truly just a commitment of another entity to supply you with said gold. By far, we buy, sell, lend and borrow something of an illusion. Paper trading dwarfs physical by an incredible amount. Mostly because the majority of us investors do not want to actually possess, and therefore use the physical gold.

This price illusion is exactly the opposite of my above example. The credit gold price is driven far below the real gold price because supply is easily expanded to extend to anyone wishing to trade an illusion.

Other guides all point out that this cannot go on forever as eventually "Real demand usage" catches up with available "real supply". I agree. However, society has a way of changing the rules when the economic wealth that their savings are based on comes into risk. Our fiat banks will not be allowed to fail. Just as in 1971, when that real gold demand suddenly expands it's boundaries to include ordinary gold investors, the supply rules will be changed again.

Fortunately for us Physical Gold Advocates, the next rule change will evolve from a reserve system that has no threat from a rising dollar gold price. Even if the contract markets crash and physical gold traded in Europe goes into the thousands, the Euro will find strength from such an occurrence. The ECB will embrace it and promote the same.

The manipulation in the gold market works in reverse to the lunacy in the RE markets around the world. Unlimited paper derivatives depress the physical gold price. Unlimited credit/debt inflates the price of land. We can evaluate the asking price of a house by looking at the replacement cost. We cannot do that with land. Land is (and always has been) a prime candidate for inflation for this reason.

Let’s compare the RE situation to the stock market. I see a lot of speculation about why the Fed supports the US stock markets. People talk about the wealth effect, psychology etc. That's all BS in my opinion. I read a credible report a couple of years back which claimed that if the Dow had remained below 8,500 for a while longer then the insurance companies would have been forced to recognize the losses in their investment portfolios. That would have rendered most of the insurance industry insolvent.

There is no lender of last resort, no CB for the insurance industry. All they have to fall back on is reinsurance contracts and their investment portfolios. Counter-party risk (amplified to an insane degree) and paper assets for the most part. Goosing the stock market prevented the whole insurance industry (worldwide) from becoming insolvent. At its core Warren Buffett's BRK is an insurance company so that’s where his interests lie.

IMHO there is no middle ground. The outcome of this latest experiment in global finance has always boiled down to two choices. Hyper-inflating the currencies of the (nominally) overly indebted economies or accepting massive defaults and debt write offs. In my opinion it’s either Iceland or Ireland folks.

Either way I think we would be wise to get out of the way by taking refuge in hard assets that don’t carry any debt and remaining liquid (cash) to ensure we aren’t forced to part with any of those assets until we want to. Hopefully we can ride this out while the geniuses who gave us “government finance” in the various countries we live in decide what they are going to do about this mess.

Costata said :Either way I think we would be wise to get out of the way by taking refuge in hard assets that don’t carry any debt and remaining liquid (cash) to ensure we aren’t forced to part with any of those assets until we want to.

I guee as per your prognosis Real estate on credit is not good investment now.

Today calculatedrisk pointed Housing price-to-rent ratio is at near all time low.

Costata : If US experiences "iceland" woudn't it be better to take a 30 year mortgage loan at 3.75% ?

Also combining with OBA's comments, T-Bills can go negative yield with 10yr at 10%, then those 30 yr loans would not longer be available. Even if those long duration mortages were available, they can crash a real estate market on credit. But looking at rental market, which is getting stronger in US, a 30 yr loan looks good even if price of house goes down.

No problem about any delay. I owe burningfiat a reply as well but my attention has been elsewhere over the past few days.

Thanks for the link to the Cook post. I wasn't greatly impressed by his arguments until I delved into the discussion in the comments on the post. They were very interesting. (Particularly the responses from Cook and Yves Smith.)

The following looks like a perfect set up for a takedown.

paulbkk says:February 27, 2012 at 11:22 pm

From Reuters 14 February 2012:

“Hedge funds and other money managers are now running more than six times as many long positions in U.S. crude futures and options (287 million barrels) as short ones (45 million barrels).

The ratio of long to short positions has doubled since October and is more stretched than any time since May 31, 2011, when funds were still liquidating long positions after the flash crash on May 5.”

I’m guessing the same is pretty much true with Brent, but haven’t checked. So you’re saying the oil producers have hedged short, 45 million barrels, in order to catch out the speculators who are long 287 million barrels. Am I understanding you correctly?Reply

Chris Cook says: February 28, 2012 at 12:53 pm

I’m saying that some oil producers – particularly those who know the true position about pre-pay and the ownership of the resulting ‘Dark Inventory” – are on the other side of the long positions.

ie they have sold futures contracts to lock in high prices – because they fear (or know) physical market prices are going down – to speculators who have bought futures contracts because they are betting prices will rise.

If my thesis is correct, then these canny producers will make massive profits on their ‘hedge’ at these speculators’ expense, and this profit will compensate them for the temporary fall in the physical market price before it gets marched back up to the top of the hill again.

“It looks like Draghi is mothballing the SMP,” said Christian Schulz, a former ECB economist now working for Berenberg Bank in London. “It has become less relevant in light of the massive loans to banks.”

Interesting observations, costata. I hadn't thought about the angle of saving the insurance industry which is, to my mind, one of the biggest rackets going. How fitting that this is OG's line since he is nothing if not a racketeer. And, on another note, somehow, it's strange, at least to me, that there's just a difference of one consonant between (the spelling) of Iceland and Ireland.

In the meantime, the silver beast is back in action and we shouldn't be surprised by whatever fireworks may ensue.

The risk rating guidelines are just as useless as the weighted average cost of capital. Stuff your bank with....and mark to....

I will hold some silver because of its usage value and the fact that it is on the road to becoming extinct. Thus if things totally break down, its a solid, portable commodity to have.

My soul begs me to support a silver standard, but I get the focal point argument if central banks are a fixation of the future.

I can't help but feeling that the Euro is currently playing the middle against both sides but I doubt it has a role as "the" reserve currency in this day and age. At this point, if RPG goes online it has a few competitors.

Insurance is a biggie, but think about the compensation structure under major pension plans. That's an illusion that has to hold to keep the peace.

Hyperinflation of everything outside of what is needed to keep the peace until...

JR, thanks for the derivatives piece. FOFOA, glad you highlighted that four part response, It is unequaled.

What I am trying to find on the freegold blog:Why do people think, that gold will flow (in the distant freegold future)?Right now we have a flow of gold into the super strong hands. Why should this stop?Okay, maybe there are some suckers that wait for the 20-bagger to release their gold to finally live a decent life, fine. But the super producers, why should they sell especially when "freegold" becomes common sense?Personally I do have everything I need and want. And under todays economic situation I do not see this to change dramatically. Why should I part from my gold? As FOFOA describes: "intergenerational wealth". ACK, but why should the giants part from it (in a "freegold environment"), so the dirty unwashed masses can play with it?Just wondering..Thanks for explanations & Greets, AD

Bangalore is a bigger Gold Hub, and Chennai even bigger. I think the rates will be much better in Chennai, but I am not aware of the charges there.

If we buy bullion, we get 1% VAT + 2-3% spread. This is when buying from a good shop. If you pick it from a normal jeweler there is generally an extra charge to the tune of 80-100USD per 100gms.

If we buy coins, there is 2% VAT + making charges to the tune of 4% + some spread. It comes out to be around 8%-9% total. This should be constant across locations as these are bank quotes, SBI. Quotes from private banks like ICICI can be much higher.

All jewelry has a 2% VAT + making charges and wastage. It comes out to be nearly 20%. The making charges depend on the complexity of the design. 4% would be for the very basic design. I don't think extra charges would be less than 15%.

matrixsentry: They will still not sell the gold even after re-evaluation. The thinking is that a person gets some amount of gold from their parents and in his lifetime he has to increase the gold when he passes to his children. That is the mark of a successful man. To use it for creature comforts and cause it to reduce would be anathema to the people.

This is what causes all the gold to come to India. It has nothing to do with its cost. People live on very limited comforts and still hold kilos of gold. Some may sell gold but only what they have collected on their own, not what they have received from parents and in marriage.

I have been pondering on what are the processes that cause the gold to increase in value over time. I mean the value compared to other commodities. This also explains why gold standard cannot work in the present times.

Population is not a good reason. It affects both gold and other commodities equally.

I think the major reason is technology.

Technology makes things cheaper to produce reducing their value compared to gold, as gold production has not depend too much on technology improvements.

The increased productivity due to technology raises prosperity levels. Allowing people to have a larger production surplus and consequently ability to store more value in gold.

Before 20th Century technology growth had been slow. But there was a marked increase in productivity in the 20th century.

Whenever a gold standard is created a fix is done so that the gold based currency is more expensive than actual gold. Overtime due to technology improvements the gold becomes increases in value and the currency becomes cheaper. This causes a crisis in the system, as people will prefer to hold gold rather than currency. This will require a new fix and currency devaluation.

Due to the advancement of technology the period between two fixes would become too small to be practical.

Since there has not been a revaluation of gold for a very long time. Even the peak at 1980 probably was not above the actual value. And then over then next 20 years the value had actually decreased. The appreciation since 2001 is not sufficient.

The gold would revalue when the paper gold burns, whether we get RPG or not. And it will burn when USD burns. I don't think anything other than RPG could be a workable solution. Not SDR, Yuan, or Euro.

Okay, here it is. What you've been waiting for patiently, I presume. This is what gold will be freed from: The fractional reserve banking practice, which is a carryover from the gold standard.

This is the free in Freegold.

If you are talking about high priced gold, you're talking about Freegold/RPG. Freegold/RPG marks the end of the paper gold market / aka fractional reserve gold banking, which is what keeps gold's price divergent from its value.

In my opinion, there are two things we learned from ANOTHER via his mouthpiece FOA that outweighed all the other great insights they shared. Those two things are:

1. The true purpose behind the euro and its architecture, and2. The effect the approaching euro launch would have on gold.

[..]

What we learned from ANOTHER thirty years later was:

1. The purpose of the euro was to provide an international transactional alternative to the dollar.2. The consequence of the launch of the euro would be that gold would undergo "the most visible transformation since it was first used as money."

Quote - Monday, August 6, 2001 - GOLD @ $267.20 - FOA: "The result will be a massive dollar price rise in gold that performs over several years."

There has been a great deal of commotion of late, and over these past few months, about China and their growing influence in the gold market. It is coverage well deserved and very important. It got me thinking it would be a good time to go a bit retro re the GATA story as it revolves around gold, the Chinese, and the Russians … and why it is so important for gold investors to know what they know … as well as what GATA knows.

It is very simple. The Gold Anti-Trust Action Committee was formed in January of 1999 to expose the manipulation of the gold market. At the time we thought it centered around various bullion banks, such as JP Morgan, Chase Bank, Goldman Sachs, etc. It wasn’t too long after that we realized the manipulation was far more vast … that it included our Fed, US Treasury, Exchange Stabilization Fund, and other central banks such as The Bank of England.

After GATA was formed, the price of gold spent a couple of years below $300 an ounce. Oh how people forget the real deal as time goes by. Back then GATA railed against the hedging practices of the likes of AngloGold, Barrick, etc. At the advice of The Gold Cartel bullion banks, or in cooperation with them, they sold their forward gold production years in advance. GATA POUNDED the table about the absurdity of it all … that it was not only sinister, but a fool’s game. We were attacked/mocked by the gold establishment for vilifying the hedging producers and the bullion banks for their role in the gold price suppression scheme.

Long story short…

*AngloGold and Barrick eventually closed out their hedge books, taking something like $8 to $10 billion in LOSSES apiece.

*GATA is still around and thriving, Goldman "Hannibal Lecter" Sachs let its hedging guru, Don McConvey, go as JP Morgan did to its guru, Kevin Crisp. While The Gold Cartel’s initial ringleader, Goldman Sachs, disappeared from the gold rigging scam a few years ago.

*The price of gold rose to $1900+ per ounce, corrected, and is now on its way to $3,000 to $5,000 per ounce … which is the price I jumped up and down about at our Gold Rush 21 Yukon Conference in August of 2005 … a price (in my opinion at the time) that would eventually be needed to clear the market. The price of gold back then was $436 per ounce!..

Costata, you are spot on in identifying the insurance industry as a potential problem.

Solvency II is arriving soon, and the insurers will have to get their houses in order. However, I feel Exter's pyramid will lead to the demise of many insurance companies as the end game unravels (and perhaps some supercharged physical gold demand?). Yet again, it's Europe that is driving the changes, and whilst I'm no fan of Euro regulations on bananas, it seems they are on the right lines in the financial world!

If I may -- the 30 yr mortgages are seriously mispricing the risk of inflation.

Even if there is some hope of real growth, equities and commodities will start seeing major fund inflows from the bond market. Large money is sitting in the bond market.

Is there some hope for real growth? That's something to consider before taking on a mortgage.

Another important thing is stability in your income stream sources. How stable are they?

For instance, FOFOA has said that he has not taken on any debt and remains fully 100% in physical gold. His income stream is from this blog, which probably cannot support servicing a mortgage. This is another aspect to be taken into account.

Overall, if you ignore super pricy areas like Bay area, NY etc. -- the rest of the market will remain flat or can go down further -- but I seriously doubt if the Fed will just simply crash the housing market. They won't, therefore I expect prices to stagnate at least for a decade, if not more.

If it's Bay area, then residential home prices are still way too high to match rentals. Sure rental market is tight because of the job market, but residential properties are still overvalued. That's what I gather from the popular housing forum.

There are some people in that forum that I know of, who have invested in several rental properties in Concord. If it's an investment rental, I would expect a "cushion" above the PITI (principal, interest, taxes and insurance) to make the rental attractive.

FOFOA, man, your writing style.. You are the king of take a simple crystal clear line and dilute it into 5 pages of foggy, hard to trace macaroni.Yes, you right, you right, but.. Have you read the Relativity Theory of Einstein? Every sentence is so crisp and you never get the feeling you are going in circles. If you came up with the Relativity Theory.. I still wouldn't know what that is.

Sorry. I have already determined in my own mined that golds value is the unknown constant. And that price is irrelevant in terms of the current paradigm.

You are saying golds value is constant over time? And this value is against what? Value is a comparison. The value cannot exist in a vacuum. Like FOFOA said, if all the gold was with one person it would cease to have any value.

Reality. The time to utilize golds value is a waiting game. But most of its utilization is in the ability to wait, whereas, with currency - time is not on its side.

Which currencies are you talking about? Yuan or Ruble or Euro. FOFOA's thesis is that both freegold and local currencies will exist together. The USD will hyperinflate and get burst is a different thing.

FWIW, I started reading FOFOA quite recently and I find his writing clarity unparalleled to any other blogger I've ever read. Yes the posts are long, but so is the nature of the topic. The topic of Freegold is complex and it takes a lot of words to get the whole big picture clearly.

But if you start breaking down the posts into manageable content to read, you will start to see that they are all clear in their own unique way as well. For example, FOFOA's dilemma is as concise and clear a statement as it can get, and gets the point across.

And this value is against what? Value is a comparison. The value cannot exist in a vacuum.

True, value cannot exist in a vaccum.

As Carl Menger, the founder of Austrian School said:

Value does not exist outside the consciousness of mankind .

Like FOFOA said, if all the gold was with one person it would cease to have any value.

IMHO, FOFOA did not say value of gold ceases to exist if one person had all of it.

This is what FOFOA said:

“Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve , which requires a much higher valuation than it has right now.”

It will be most valuable when widely distributed, but it does not mean that gold's value ceases to exist when there's unequal distribution.

Throughout history, Kings have had a lot more gold than ordinary people and this is true even today. Bankers, Financiers and other wealthy giants have a lot more gold than ordinary people.

This unequal distribution does pose a lot of problems, because the wealthy can choose to use their gold to extract more rents from the system.

“The fundamental principle of human action, the law, that is to political economy what the law of gravitation is to physics is that men seek to gratify their desires with the least exertion” - Henry George.

Which currencies are you talking about? Yuan or Ruble or Euro. FOFOA's thesis is that both freegold and local currencies will exist together. The USD will hyperinflate and get burst is a different thing.

All of them. Despite the recognition of the Euro's position, I have never seen fofoa or anyone else here suggest to own as Euro's within the current paradigm. On the contrary, it is to own unambiguous physical gold. $IMFS is the root of all currencies, because it is the world reserve currency. When it crumbles, all other currencies crumble too, in relativity. The Euro can reboot under RPG, the dollar cannot. But you want to have gold thru the transition, not Euro's.

Understand the difference between price and value. Price fluctuates, value does not. If the value of gold fluctuated, it wouldn't make a very good reference point.

Currently, price is not a reflection of value. Anyone that understood the value of gold would never let their gold bid for dollars at today's prices. In the next paradigm, gold's value will be known, at least in terms of price, when currency and gold bid for each other in equilibrium.

But even that is subjective. For the sake of understanding that gold must set the price of currency and not the other way around, we must view it as constant. In price terms, golds value has never been realized in our lifetime.

So, quickly cutting to the chase, the logical conclusions we can deduce from this conceptual line of Thought are that:

1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and

2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.

I say this is the rough limit because it represents the emergency exit from said flawed medium.

So the next step is to ask ourselves the obvious question. How much "stored purchasing power" exists in the world today?

[...]

This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.

Gold is simply a medium for storing purchasing power, for saving excess production - the value people have created that has not been consumed. So how to look at the value of gold - maybe look at how much real wealth is there to save, aka how much real capital is out there in the physical plane?

When we compare investment gains to inflation, what we're really doing is discounting the devaluation of the numéraire over the period of the gain. In other words, we are gauging our gain against the physical plane of goods and services which is what really matters. Another way to look at it is that the dollar was devalued against goods and services while your investment was revalued. This is what I meant when I recently wrote the following:

"I cannot see a dollar collapse without a simultaneous revaluation of something else. It's a seesaw. The dollar isn't collapsing against gold. It is collapsing against the physical plane of goods and services. That's the fulcrum, not gold. Dollar collapse is the force, goods and services the fulcrum, and gold the load. So gold is revaluing against goods and services. The gold revaluation is against the physical plane so as to fill the reserve void left by the dollar's collapse."

I tend to agree that the vaunted puke will require another substantial downdraft to emerge. In the meantime, good riposte MF, there clearly are circumstances (that obviously one hopes never come to pass) that amount to game changers with respect to the "value" of all material items.

Rothbard's "What has the Government done to our money?" is an excellent work to be honest.

But the problem with the American Austrians (Rockwell, Wenzel, Woods, North etc.) are that they think of themselves as the defendants of Mises/Rothbard and continue to blindly spout out talking points as if what Mises/Rothbard were always correct and never wrong .

You can consider the way they treated Fekete regarding his theory of interest rate and discount rate -- to clearly understand what I'm referring to, when I say that they are dangerously dogmatic.

As long as Dr. Paul continues to associate himself with the dogmatic positions (which will basically bring back all the problems of the fixed gold standard era), I don't have any faith it will really solve any of our present day predicaments.

You are so right about Rockwell, Wenzel, Woods, North, etc. Those economists strike me as trying to enforce the words of the Austrian Messiahs (Mises, Hayek and Rothbard) to the degree that all truth in economics has been uncovered and nothing can be added to their written word. To my (non-PHD in economics) impression, the concept of freegold never occurred to them, yet it satisfies fully the Austrian base theory.

As for Fekete’s real bills, the only thing to say past what I said above: they create a strawman from calling irredeemable bank notes the real bills and then merrily go about destroying it. Sad, really…

As for Dr. Paul, he disappointed me today AGAIN when talking about making gold a medium of exchange again…

However, just to be clear I do not look to any of them to bring freegold about by decree. IMHO, it will come about as the path of least resistance to monetary conditions, not fought for and introduced with great fanfare by politicians. Then, all these guys above plus the Keynesians can be free to start sabotaging it as best they can, and can make a nice living selling books on theories of how to do it. The circus will never stop I’m afraid…

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